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                     COUNCIL OF                        Brussels, 15 May 2007


                                                       SOC 209

from:               Secretary-General of the European Commission,
                    signed by Mr Jordi AYET PUIGARNAU, Director
date of receipt:    14 May 2007
to:                 Mr Javier SOLANA, Secretary-General/High Representative
Subject:            Commission Staff Working document
                    - Europe’s demographic future: facts and figures

Delegations will find attached Commission document doc. SEC(2007) 638/vol. I.


Encl.: doc. SEC(2007) 638/vol. I

9654/07                                                              RB/vk       1
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                               Brussels, 11.05.2007
                               SEC(2007) 638

                               Volume I



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                                               TABLE OF CONTENTS

     Europe’s demographic future: facts and figures......................................................................... 7
     1.         Introduction and executive summary ........................................................................... 7
     1.1.       Background .................................................................................................................. 7
     1.2.       Highlights of this report ............................................................................................. 12
     2.         Demographic transition: a common feature of social and economic development ... 28
     2.1.       The demographic transition paradigm........................................................................ 28
     2.2.       Fertility ....................................................................................................................... 30
     2.2.1.     Trends in fertility........................................................................................................ 31
     2.2.2.     Drivers of fertility....................................................................................................... 33
     2.2.3.     Tempo and quantum effects on fertility rates............................................................. 33
     2.2.4.     Results of the 2006 Eurobarometer on fertility and ageing ....................................... 33
     2.3.       Longevity ................................................................................................................... 33
     2.3.1.     Main trends in longevity ............................................................................................ 33
     2.3.2.     Expected trends in longevity ...................................................................................... 33
     2.3.3.     Important longevity differences between socio-economic groups............................. 33
     2.4.       Migration.................................................................................................................... 33
     2.4.1.     Overview of migration trends .................................................................................... 33
     2.4.2.     Relative contribution of migration and fertility to population growth....................... 33
     2.5.       Cohort effects: the baby boom ................................................................................... 33
     2.6.       The EU-27 population projection............................................................................... 33
     2.6.1.     Changes in the population structure ........................................................................... 33
     2.6.2.     Projection methods ..................................................................................................... 33
     2.6.3.     An estimate of projection uncertainty for the EU-25 ................................................. 33
     2.7.       The regional dimension of population change ........................................................... 33
     2.8.       Global demographic trends ........................................................................................ 33
     2.8.1.     Europe’s place in the global population..................................................................... 33
     2.8.2.     Population trends and challenges in Europe’s neighbourhood .................................. 33
     3.         The economic and social impacts of demographic change ........................................ 33

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     3.1.        Introduction ................................................................................................................ 33
     3.2.        Employment trends .................................................................................................... 33
     3.2.1.      Ageing of the labour force and labour market bottlenecks ........................................ 33
     3.2.2.      Ageing, productivity and prospects for economic growth ......................................... 33
     3.2.3.      The impact of ageing on future productivity.............................................................. 33
     3.3.        Challenges to public finances and intergenerational solidarity.................................. 33
     3.3.1.      Pensions...................................................................................................................... 33
     3.3.2.      Health and long-term care .......................................................................................... 33
     3.3.3.      Long-term care ........................................................................................................... 33
     4.          Opportunities for tackling demographic change ........................................................ 33
     4.1.        Introduction ................................................................................................................ 33
     4.2.        Demographic renewal: how much scope is there for increased fertility? .................. 33
     4.2.1.      Potential for more births............................................................................................. 33
     4.2.2.      Unlocking the potential for more births ..................................................................... 33 Financial support ........................................................................................................ 33 Access to services....................................................................................................... 33 Flexibility in working hours and work organisation .................................................. 33
     4.2.3.      Conclusion.................................................................................................................. 33
     4.3.        Promoting employment in Europe ............................................................................. 33
     4.3.1.      Potential for more jobs of better quality..................................................................... 33
     4.3.2.      Unlocking the potential for increased employment ................................................... 33
     4.4.        A more productive and dynamic Europe.................................................................... 33
     4.4.1.      The potential to raise productivity ............................................................................. 33
     4.4.2.      Unlocking the potential for productivity growth........................................................ 33
     4.4.3.      Ageing consumers and the ‘silver economy’ ............................................................. 33
     4.4.4.      Conclusion.................................................................................................................. 33
     4.5.        Receiving and integrating immigrants in Europe....................................................... 33
     4.5.1.      The potential of migration for redressing labour market imbalances ........................ 33
     4.5.2.      Unlocking the potential of migration ......................................................................... 33
     4.5.3.      Conclusion.................................................................................................................. 33

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     4.6.       Sustainable public finances ........................................................................................ 33
     4.6.1.     Potential for tackling the demographic challenge ...................................................... 33
     4.6.2.     Unlocking the potential .............................................................................................. 33
     4.6.3.     Conclusion.................................................................................................................. 33
     5.         Overall conclusion...................................................................................................... 33
     Annex I. Country statistics and comments ............................................................................... 33
     Annex II. European research projects on demographic change and its impacts ...................... 33

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     1.1.    Background

     Demographic change is high on the European policy agenda and, indeed, Europe has to
     brace itself for profound changes in its population structure. During the coming decade,
     the baby boom cohorts will start retiring from the labour market. Young cohorts entering
     the labour market will be much smaller as a result of low fertility. In about ten years,
     total employment in the EU could start to fall, in spite of rising employment rates.
     Europe’s potential growth rate could decline at a time when significant additional
     resources will be required to meet the needs of an increasing number of elderly people
     for whom adequate pensions and health and long-term care provision will have to be
     In October 2006, the Commission presented its views on the demographic challenge and
     the best ways for tackling it in the communication “The demographic future of Europe —
     from challenge to opportunity”1. This communication followed a major public debate
     launched by the Green Paper ‘Confronting demographic change: a new solidarity
     between the generations’ of March 20052 as well as discussions at the level of heads of
     state and government at the Hampton Court informal summit of October 2005. The
     Commission expressed confidence in Europe’s ability to cope with the demographic
     challenge and presented five key areas in which there are major opportunities for
     constructive policy responses:
     • Promoting demographic renewal in Europe;

     • Promoting employment in Europe: more jobs and longer working lives of better

     • A more productive and dynamic Europe;

     • Receiving and integrating migrants in Europe;

     • Sustainable public finances to guarantee adequate social protection and equity
       between the generations.

     As was announced in the Communication, a European report will present an assessment
     of the demographic situation every two years, reflecting the ongoing debate and research
     in the EU, in conjunction with the European Demographic Forum. This first
     Demographic report summarises the extensive analytical work carried out prior to the
     adoption of the communication on Europe’s demographic future. It draws extensively on
     the work carried out by the Economic Policy Committee and the Commission
     (Directorate-General for Economic and Financial Affairs) on future public expenditure

     1      COM(2006) 571, adopted on 12 October 2006.
     2      COM(2005) 94, adopted on 16 March 2005.

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     trends. Furthermore, it reviews on a series of demographic impact studies and a
     Eurobarometer survey commissioned under a special budget appropriation approved by
     the European Parliament (the ‘Walter’ Pilot Action of 2004 and 2005, i.e. named after its
     initiator, MEP Ralf Walter). These studies looked at a variety of relevant issues including
     the link between population decline/ageing and economic growth, the impact of
     demographic change on the skills and qualifications demanded by the labour market, as
     well as issues related to innovation and productivity growth in Europe. Finally, the report
     also reflects the hearings of leading experts in January and March 2006 as well as the
     first European Forum on demography held on 30-31 October 2006 in Brussels.

     The aim of this report is to present the main facts and figures that underpin the debate on
     Europe’s demographic future and appropriate policy responses. It starts by presenting the
     main drivers of demographic change — fertility, life expectancy and migration — and
     puts these into a long-term and global perspective. Another chapter discusses the
     economic impact of ageing and the effect this will have on future living conditions in

     A major ambition of this report is to provide facts and figures to illustrate the potential of
     each of the five key policy areas in which constructive responses to the demographic
     challenge can be developed. Thus, one chapter also reviews to what extent Member
     States have already started unlocking this potential. Although it covers a wide range of
     different areas, the material presented is certainly still incomplete and the analysis must
     be regarded as very preliminary. However, the chapter should provide a useful starting
     point for a realistic assessment of the European Union’s preparedness for demographic
     change. Country summaries based on a set of traditional demographic indicators
     complete the picture.

     In the communication of October 2006 the Commission announced its intention to hold a
     major European Forum on Demography every two years. In connection with each Forum,
     a report like the present one is to be published to support an informed and constructive
     debate both at European level and in the Member States. The reactions to this first report
     received from the various stakeholders who participated in the debate initiated by the
     Green Paper and from the high-level group of governmental demographic experts will
     serve to further improve the presentations of the biannual Demographic Situation Report.

     There are probably numerous ways in which future reports could be improved over the
     present one. Comments and suggestions would therefore be gratefully received and
     should be sent to:

     Unit E1
     Directorate-General for Employment, Social Affairs and Equal Opportunities
     European Commission
     B-1049 Brussels

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     1.2.     Highlights of this report

     This Report on the Demographic Situation in Europe 2006 consists of three main sections
     corresponding to the main subjects covered by the Communication on the Demographic
     future of the EU: an overview of the drivers of demographic change, an analysis of the main
     impacts of this change and a description of the potential for responding to the challenges
     posed by demographic change within five key policy areas. This summary highlights the main
     themes of the report, each of which is discussed more extensively in the respective chapters.

     Chapter 2:     Demographic transition: a common feature of social and economic

     The main drivers of demographic change are fertility, mortality (life expectancy) and
     migration. In addition, the passage of age cohorts of different sizes through the life cycle can
     have significant impacts.

     Regarding fertility, there are roughly two groups of countries within the EU: those with a
     moderately low fertility in the range of 1.6-1.9 births per woman and those with very low
     fertility in the range of 1.5 births or less. The average for the EU-25 is 1.5 (2005). The fertility
     rate needed for a full replacement of generations is estimated by demographers at 2.1, but
     given current levels of migration and rising life expectancy, the population size will decline
     only at fertility rates significantly below this replacement rate. Currently observed fertility
     rates may also underestimate long-term trends.

     The indicator is constructed in such a way that postponement of childbearing will initially
     lead to a lower fertility rate until the mothers’ new, higher average age at birth is reached.
     This ‘tempo’ effect may be affecting countries with the lowest birth rates, notably in Central
     and Eastern Europe. The Eurostat population projections up to 2050 assume an increase in
     fertility rates, particularly in countries with the lowest rates: for the EU-25, a slight recovery
     from 1.5 to 1.6 is assumed. A Eurobarometer survey carried out in 2006 revealed a generally
     positive attitude of Europeans towards childbearing. Women would like to have more children
     than they actually have. Moreover, they would also prefer to have their children somewhat
     later in life than they actually do.

     Since the 19th century, gains in life expectancy have above all been the result of reduced
     mortality in early life, due to general socio-economic progress and public health measures.
     More recently, mortality in mid-life has also been reduced. While socio-economic factors
     such as income and education remain important for gains in life expectancy, the availability of
     modern medical treatment is playing an increasing role, as are lifestyle changes. Life
     expectancy is generally higher in the old (EU-15) Member States (82.4 and 76.7 for women
     and men respectively) than in the new (EU-10) Member States (78.7 and 70.4 for women and
     men). The Eurostat population projections expect further increases in life expectancy by about
     six years for men and five years for women (EU-25) between 2004 and 2050. These will have
     to be brought about mainly by declining mortality at higher ages, thus contributing to the
     increasing share of older and very old people in the total population. Such progress in life
     expectancy will, however, be contingent on the avoidance of unhealthy lifestyles, including
     smoking, poor diet, lack of physical exercise and excessive alcohol consumption.

     Migration has become a major determinant of demographic change in the EU. In the second
     half of the 20th century, large parts of Europe witnessed a historical change from emigration to
     immigration. Net migration into the EU reached a peak of almost 2 million in 2003/2004.

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     However, two thirds of this observed flow concerned Italy and Spain where large numbers of
     illegal migrants, the majority of whom had arrived in these countries in previous years, were
     regularised and thus suddenly appeared in the migration statistics. If immigration is
     maintained at this very high level, the EU’s working age population would continue to grow
     until around 2030 rather than already starting to decline by the end of the present decade, as is
     currently assumed in the Eurostat population projection. However, such a perspective would
     raise growing concerns about the integration of these immigrants. Indeed, the degree of
     integration of populations of immigrant origin already present in many Member States is often
     seen as highly problematic.

     The baby boom cohorts, born between 1945 and 1965, currently still boost the working age
     population. They will start retiring soon, thereby bringing about a major shift in the balance
     between the active and the retired. About 15 to 20 years later, these cohorts will start relying
     heavily on health and long-term care systems.

     The combination of these trends will leave the total population size roughly unchanged by
     2050, but will transform Europe’s population structure. According to Eurostat’s baseline
     population projection, the median age of the EU will increase between 2004 and 2050 from
     39 to 49 years. The number of young people (aged 0-14) in the EU will continue to decline in
     absolute terms from around 100 million in 1975 to some 66 million by the year 2050. The
     population of working age (15-64) will be most numerous around the year 2010 (331 million)
     but will subsequently decline to about 268 million by 2050. While ageing will affect all
     Member States of the EU, it will do so to varying degrees. The old-age dependency ratio
     (number of people over 65 divided by the number of people aged 15-64) will reach around
     53% in 2050 for the EU-25 (up from 25% today), with the highest rates projected for Italy and
     Spain (66-67%) and the lowest for Denmark, Luxembourg, Malta, the Netherlands and
     Sweden (around 40%).

     While it may still be one or two decades before the impact of ageing becomes clearly visible
     at the level of an entire country, the impact can already be observed at regional level. In some
     regions, ‘natural change’ (difference between births and deaths) has already become negative.
     Migration may either aggravate or alleviate these trends. Regions will increasingly have to
     include the effects of long-term population trends in their regional medium-term strategies. A
     number of regions have already been active and are at the forefront of strategic thinking and
     actions to tackle the demographic challenge.

     A century ago some 15% of the world population lived in the area of the current EU-25;
     nowadays this share is 7% and by the year 2050 the share of the EU-25 in the total world
     population is projected to be around 5%, according to the UN population projections (2004).
     While all world regions — except sub-Saharan Africa — will experience significant ageing of
     their populations, the EU is the only major world region where the total population is
     projected to decline in the coming four decades. Although declining fertility can be observed
     in many developing countries, the demographic and socio-economic contrasts between
     Europe and its Southern neighbours suggest that strong migratory pressures will persist over
     the coming decades.

     Chapter 3:     The economic and social impacts of demographic change.

     Demographic change will gradually limit the scope for future employment growth. Although
     the population of working age (aged 15-64) is already expected to decline from around 2011
     onwards, total employment in the EU-25 is expected to continue growing up to around 2017

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     due to rising labour force participation. Thanks to higher education levels and greater labour
     force attachment of younger cohorts of women, female employment rates are projected to rise
     from just over 55% in 2004 to almost 65% by 2025. The employment rates of older workers
     are also projected to increase, from 40% in 2004 for the EU-25 to 47% by 2010 and 59% in
     2025. From around 2017 onwards, however, the shrinking working age population will lead to
     stagnation and, subsequently, reduction of total employment. Projections show that, as
     employment decreases and productivity becomes the only source of future economic growth,
     the annual average potential GDP growth rate in the EU-25 will decline from 2.4% in the
     period 2004 to 2010 to only 1.2% in the period 2031-2050.

     Declining employment at a time when the number of older people in need of adequate
     pensions and health and long-term care is rising will make it a challenge to provide sufficient
     resources for social protection in a sustainable way. The projected increase in these
     expenditure categories by 2050 is about 4.5 percentage points of GDP in the EU-25. Public
     and private spending on pensions, which averaged 13% of GDP in the EU (in 2003), has
     ensured that being old is no longer associated with being poor or being dependent on one’s
     children. However, Europe’s future ability to provide the ageing population with adequate
     pensions will crucially depend on whether the effective retirement age can be raised and the
     pension systems adapted to increasing life expectancy, thereby making the relationship
     between contributions and benefits transparent. The main consumers of health and long-term
     care today are elderly people, whose projected increasing numbers will result in greater
     demand for these services. According to Eurostat projections, the share of the total population
     over 80 will rise from 4.1% in 2005 to 6.3% in 2025 and to 11.4% in 2050. Although age in
     itself is not the only factor influencing healthcare spending (though it does serve as a proxy
     for a person’s health status), projections illustrate that an ageing population will bring about
     pressure for increased public spending on health and long-term care.

     Chapter 4:     Opportunities for tackling demographic change.

     The Commission’s Communication on ‘The demographic future of Europe — from challenge
     to opportunity’ identified five key policy areas in which constructive responses to the
     demographic challenge can be developed. These include birth rates, employment levels,
     productivity growth, migration and the sustainability of public finances. If policies in these
     areas are formulated in an integrated manner, synergies may be reached. For example,
     policies that promote the labour market participation of older workers will also have a
     positive impact on public finances. In addition, more competitive markets will increase the
     return on investment in older workers.

     Promoting demographic renewal in Europe through greater gender equality

     While the choice to have or not to have (more) children is and must remain a private one,
     there appears to be scope for policies to enable families to make their choices. Indeed, survey
     evidence suggests that Europeans generally would like to have more children than they
     actually have. International comparisons show that policies supportive of those who wish to
     have children can have some effect in raising birth rates. Even small changes in fertility rates
     will have a strong impact on the population size and age structure in the long run. However,
     an increase in fertility rates will only translate into a larger working age population and
     increased employment after 20 or more years. Therefore, it could at best make a small
     contribution to tackling the challenge of providing for the ageing baby boom cohorts.
     Furthermore, the number of women of childbearing age is also projected to fall in the coming

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     If the aim is to enable people to have the number of children they really wish, public policies
     that promote greater gender equality and facilitate the reconciliation of work and care seem to
     be most successful. It is primarily women who adjust their career ambitions to the needs of
     their families (including caring for elderly relatives), either by dropping out of the labour
     market or working part-time. Countries that have achieved the highest female labour force
     participation and the most progress in terms of gender equality (as reflected in differences in
     time use patterns between men and women) today also display relatively high fertility rates.
     Some 20 years ago, countries with high female labour force participation tended to display
     lower fertility than those with low female labour force participation. Access to services (in
     particular affordable day care provision of high quality), flexibility in working hours and
     conditions as well as gender equality (including shared family and domestic responsibility)
     are all important factors in reconciling work and private life. In addition to policies that
     promote better conditions for women and men wishing to raise a family, it may become
     increasingly important to address biological obstacles to fertility. As potential parents
     postpone the moment at which they decide to have children, infertility is becoming a more
     and more frequent obstacle to the realisation of their desire to have children. The availability
     of fertility treatments may then have some impact on birth rates.

     Promoting employment in Europe: more jobs and longer working lives of better quality

     The effective old-age dependency ratio, or the ratio between people over 65 and the employed
     persons aged 15-64, is even higher than the demographic dependency ratio and is projected to
     rise from 37 to 70 in the EU-25 by 2050. Despite a significant increase in employment rates,
     the effective old-age dependency ratio is projected to worsen significantly. Raising the EU-25
     employment rate to the level of the current three best-performing Member States, however,
     would compensate for about two-thirds of the decline in employment expected to result from
     a shrinking working-age population. Such an increase in employment rates would, of course,
     require many changes in the labour market and in institutional arrangements. A life-cycle
     approach aimed at enabling people to remain much longer active and productive, including
     through lifelong learning and better health protection, is needed. The main potentials for
     increased employment rates lie with women and older workers and some other disadvantaged
     groups on the labour market..

     In order to unlock these potentials, raising levels of educational attainment seems to be
     particularly important. Higher levels of education are associated with significantly higher
     employment rates and much lower unemployment rates. In 2005, the average employment
     rate among the highly-skilled in the EU was 82.5%, for the medium-skilled (those having
     completed upper secondary education) it was 68.7%, whereas for the lowest skilled it was
     only 46.4%. Both the Lisbon strategy and the European Employment Strategy aim to increase
     employment and growth and provide guidance on how to meet demographic challenges. A
     higher labour force participation of women will require better provision of affordable high-
     quality childcare and care of other dependents, shared family and domestic responsibilities
     between men and women, reduced gender pay gaps, enhanced gender equality and equal
     opportunities. The European Pact for Gender Equality adopted in 2006 aims at mainstreaming
     gender in all actions taken and will be a tool for increasing the employment of women.
     Prolonging working lives by providing effective incentives for later retirement is an even
     more important policy to unlock the potential for increased employment. This concerns not
     only pension schemes, but also early retirement and social security schemes (disability,
     unemployment, sickness) that are sometimes used as an exit-route. Older workers are
     nowadays in a much better health condition than the same category of workers 40/50 years
     ago. Moreover, as today’s older workers entered the labour market at a later stage,

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     strengthening incentives to remain on the labour market seems appropriate. This can be
     further reinforced by adopting a life-cycle perspective. Active ageing needs to be prepared for
     by a good initial education that enables workers to participate in lifelong learning. Health
     promotion throughout working life, as well as effective and efficient health services are also
     important because a healthy workforce is more productive. Ill health is a key factor in
     absenteeism and early retirement. Pension reforms in the majority of Member States are
     already raising the labour market exit age and would be further underpinned by promoting the
     employability of older workers, both with regard to their skills and their health status. The
     labour potential of all groups must be fully used and measures taken to better integrate
     disadvantaged groups on the labour market, such as disabled persons, ethnic minorities and
     people with a migration background. A high youth unemployment rate is also a serious

     A more productive and dynamic Europe

     Economic growth and high living standards beyond 2017, when total employment is expected
     to decline, will depend solely on increases in labour productivity. There is a huge potential for
     productivity improvements in Europe if all Member States were to catch up with the highest-
     performing countries whose productivity levels are above or close to that of the US. Indeed,
     even the productivity leaders can further accelerate their growth by removing obstacles to
     innovation and structural change and by boosting research and development leading to new
     products and more efficient production processes.

     The key to unlocking this potential is to invest in human capital. The example of the highest-
     performing Member States shows that general education levels across the EU can still be
     raised significantly. In this context, it is particularly important to reduce the number of early
     school leavers, who will face increasing difficulties in future labour markets. In 2005, 17% of
     men and 13% of women aged 18-24 had not reached more than lower secondary education
     and were not in further education or training. Further improvements are also necessary with
     regard to the proportion of people with an upper-secondary or tertiary education. Spending on
     tertiary education in the EU-25 represents only 1.2% of GDP, compared to 2.9% in the US.
     The gap between the EU and the US is somewhat smaller with regard to R&D spending,
     which is just under 2% of GDP in the EU and nearly 2.7% in the US. Europe’s future capacity
     for innovation and productivity growth will depend on increased investment in top-level
     education and research. This will also be crucial for successful adaptation to the new market
     opportunities brought about by the ‘silver economy’, i.e. new goods and services adapted to
     the changing needs and demand patterns of an ageing society.

     Receiving and integrating migrants in Europe

     Europe will continue to be an attractive destination for migrants due to its prosperity and well-
     functioning societies. However, it should be noted that the EU is not as successful as the USA
     and Canada in attracting the highest-skilled migrants. The procedure adopted in 2005 for the
     admission of third-country researchers is a first step towards addressing this issue3. Such
     arrangements need not come at the cost of developing countries in the form of brain drain, but
     can and should be beneficial to all parties. Around 3.7% of the EU-27 population are non-EU
     nationals (5.1% in the EU-15). Migration is therefore already responding to the needs of

     3      Directive 2005/71/EC.

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     European labour markets, and this need for both high- and low-skilled migrant labour will

     While internal mobility of workers within the EU will not change demographic trends for the
     EU as a whole, it does represent an enormous potential for higher rates of participation and
     employment as it opens up better opportunities for people living in regions where they face
     poor labour market prospects. Countries that have experienced rapid economic growth over
     recent years, like Spain and Ireland, have clearly benefited enormously from the significant
     inflow of workers both from outside and from within the European Union.

     The main challenge to realising the potential of immigration is the integration of migrants and
     their descendants into European societies. The Member States of the EU have evidently had
     different degrees of success with labour market and social integration. The educational
     attainment of non-nationals is generally substantially lower than that of nationals, although in
     several Member States the percentage of non-nationals with tertiary level education is actually
     higher that that of nationals. At the same time, in several Member States, the employment
     rates of migrants, particularly migrant women, are very low. Linked to this insufficient
     integration of migrants in their host societies is a rather negative perception of immigration:
     Eurobarometer results indicate that on average only 4 out of 10 EU citizens feel that
     ‘immigrants contribute a lot to their country’, while a slight majority of citizens (52%) do not
     agree with this statement.

     Sustainable public finances to guarantee adequate social protection and equity between the

     In all Member States, the ageing of the population will increase public expenditure on
     pensions, health and long-term care. Projections show that most Member States where
     pensions are financed by specific contributions will see a growing imbalance between
     contributions and needs. The reserve funds established by several Member States can alleviate
     future financing needs but appear to be inadequate in most cases. In most Member States,
     public finances are not sustainable in the long run under current policies. Budgetary
     consolidation and further reform efforts in pension, health and long-term care systems are
     required. An increase in the number of years that people remain active and in good health will
     help to reduce the financial pressure on health and long-term care systems.

     Apart from future expenditure and revenue trends, the long-term sustainability of public
     finances depends on the current deficit and debt situation, which if left unchanged can put
     public finances on an unsustainable path. Interest payments on public debt can represent more
     than 10% of public revenue in some Member States. Reducing current deficit and debt levels
     and avoiding unsustainable expenditure trends are recommended policies to ensure that
     Member States remain capable of meeting future spending needs, including those arising from
     population ageing. The potential for further consolidation of public finances differs greatly
     across Member States.

     To consolidate public finances over the long-term, it is important to act at a time when growth
     prospects are still favourable. The EU has a window of opportunity of about 10 years until
     employment is projected to start to fall as a result of a shrinking working age population.
     Mobilising the full potential of older workers, including making use of the window of
     opportunity to reform pension and healthcare systems and prevent the early withdrawal of the
     baby boom cohorts from the labour market will be key to tackling the challenges of ageing.
     This will strengthen Member States' capacity to ensure adequate social protection of the

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     elderly while making sufficient investment in younger generations and hence maintain
     intergenerational solidarity.

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     2.1.     The demographic transition paradigm

     Explanations and projections of population trends in different parts of the world have been
     generally guided by the paradigm of demographic transition. This term was first used by the
     American demographer Warren Thompson in 19294 to label the changes — or transitions —
     he observed in birth and death rates in industrialised societies over the past two hundred
     years. There always appears to be a common pattern: after an initial decline in death rates,
     birth rates also start to fall, albeit with a certain lag. During this time lag, birth rates will be
     much higher than mortality rates, resulting in a rapidly growing population. The paradigm fits
     well with the remarkable mortality and fertility changes that happened first in Europe in the
     19th century and in much of the rest of the world during the 20th century. The transition can be
     broken down into four different phases.

     Stage one corresponds to pre-modern-times and is characterised by the absence of a clear
     population trend. During the second stage there is a dramatic rise in population caused by a
     decline in the death rate while the birth rate remains high. The decline in the death rate is due
     to improvements in food supply thanks to higher yields in agriculture and to improvements in
     public health5 (water and food handling, hygienic conditions) which result in a particularly
     pronounced decrease in childhood mortality. The increasing survival of children leads to a
     younger population structure. The trend is amplified as the larger surviving cohorts start to
     have children of their own at the same high fertility rate as their parents. During stage three
     the birth rate declines, which moves the population back towards stability (in most Northern
     European countries such a decline in birth rates already started at the end of the 19th century).
     Towards the end of stage three the fertility rate falls to replacement levels, but as a result of
     population momentum (i.e. the large number of young people), the population continues to
     grow. Finally, stage four is characterised once again by stability with the population no longer
     growing and the population age structure has become much older.

     Such a demographic transition seems to be a common feature of development across the
     world, although there are important differences in timing between the various regions. In the
     1950s, the birth rates in Europe were almost twice as high as the death rates, which resulted in
     significant population growth. It was during the 1990s that Europe entered stage four, when
     the gap between birth and death rates closed. Europe then started to have a birth deficit
     resulting in negative natural growth. Consequently, any further population growth has been
     the result of net immigration. Less developed regions of the world are by and large still in
     stage three of their demographic transition — death rates have already declined significantly
     and birth rates are now also coming down, albeit from a very high level. India is expected to
     complete its demographic transition by the middle of this century. The only region in the
     world where birth rates have not yet come down is Sub-Saharan Africa, which still appears to
     be in stage two of the demographic transition. Here the population is growing fast even
     though the decrease in death rates has recently slowed (due to the fact that in several African
     countries mortality has actually increased as a result of the HIV/AIDS epidemic).

     4      Thompson Warren S. 1929, Population, American Sociological Review 34(6), pp. 959-975.
     5      Readers of the British Medical Journal chose the ‘sanitary revolution’ as the biggest advance in
            healthcare since 1840, see

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     2.2.      Fertility

     Europe’s demographic past is well described by the demographic transition paradigm.
     However, the very low fertility rates observed over the past decades raise the question
     whether the assumption of a return to a stable population size, as foreseen for the fourth stage
     of the demographic transition, is a good guide to the future.

     2.2.1.    Trends in fertility

     The most commonly used indicator for fertility is the Total Fertility Rate (TFR). It gives the
     average number of children per woman, assuming that all women are going to give birth
     according to age specific fertility rates observed for a given period. All EU Member States
     have now TFR levels below 2.1, the level needed for the replacement of generations.

     Within the EU there are roughly two groups of countries: those with a moderately low fertility
     (in the range of 1.6-1.9 births per woman) and those with very low fertility (in the range of 1.5
     births or less). The difference may appear small at first glance. However, it has major
     implications for a country’s long-term demographic future. The Australian demographer Peter
     McDonald6 has warned that: ‘In a stable population with a fertility rate of 1.3 births per
     woman, the population falls at the rate of 1.5% per annum. Such a population, in 100 years,
     would (all other things remaining equal) fall to less than a quarter of its original size. In
     contrast, with a fertility of 1.9, the rate of decline in a stable population is only 0.2% and the
     population size after 100 years would be 82% of its original size.’ McDonald concludes that
     ‘it is an error to convey the impression that in the long run of history a fertility rate of 1.3 and
     a fertility rate of 1.9 is much the same thing. Fertility falls from 1.9 to 1.3 through 60% of all
     women having one fewer child!’ On the basis of this argument a distinction is made between
     countries with a dangerously low fertility rate of below 1.6 and countries with a comfortably
     low fertility rate. The latter countries can still expect to offset their natural population decline
     with a reasonable level of immigration.

     6        McDonald, P., ‘Gender equity, social institutions and the future of fertility’, Journal of Population
              Research, No 17(1), 2000, pp. 1-16.

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     Table 2.1 Total (period) fertility rates (increases compared to previous column shaded)

                     1960/64          1970/74         1980/84          1990/94         2000/03         2004/05*   2050**
     EU-25             2.64             2.23            1.79            1.56             1.47            1.50      1.60
     EU-15             2.67             2.23            1.72            1.50             1.50            1.55      1.61
     NMS-10            2.47             2.21            2.19            1.87             1.30            1.25      1.58
     BE                2.64             2.07            1.61            1.62             1.63            1.64      1.70
     CZ                2.22             2.14            2.01            1.72             1.16            1.23      1.50
     DK                2.58             1.97            1.44            1.73             1.75            1.78      1.80
     DE                2.46             1.77            1.48            1.32             1.35            1.37      1.45
     EE                  :              2.13            2.12            1.67             1.35            1.40      1.60
     EL                2.25             2.33            2.02            1.37             1.27            1.29      1.50
     ES                2.86             2.87            1.94            1.30             1.26            1.32      1.40
     FR                2.83             2.36            1.88            1.72             1.89            1.90      1.85
     IE                3.91             3.84            2.92            1.99             1.95            1.99      1.80
     IT                2.50             2.37            1.55            1.28             1.26            1.33      1.40
     CY                3.47             2.38            2.46            2.35             1.54            1.49      1.50
     LV                  :              2.01            2.01            1.70             1.24            1.24      1.60
     LT                2.57             2.28            2.04            1.86             1.30            1.26      1.60
     LU                2.33             1.77            .48             1.65             1.67            1.70      1.80
     HU                1.88             2.01            .82             1.77             1.31            1.28      1.60
     MT                3.16             2.21            .98             2.02             1.58            1.37      1.60
     NL                3.17             2.15            .52             1.59             1.72            1.73      1.75
     AT                2.78             2.08            .61             1.49             1.37            1.42      1.45
     PL                2.76             2.24            2.33            1.93             1.28            1.23      1.60
     PT                3.16             2.71            2.05            1.53             1.48            1.42      1.60
     SI                2.25             2.14            1.91            1.38             1.23            1.22      1.50
     SK                2.93             2.50            2.29            1.94             1.22            1.25      1.60
     FI                2.68             1.64            1.68            1.82             1.74            1.80      1.80
     SE                2.30             1.90            1.64            2.04             1.62            1.75      1.85
     UK                2.86             2.20            1.81            1.78             1.66            1.74      1.75
     BG                2.23             2.16            2.01            1.57             1.25            1.29      1.50
     RO                2.10             2.65            2.18            1.55             1.28            1.29      1.50
     HR                2.12             1.93            1.90            1.55             1.34            1.35     1.85***
     TR                6.18             5.68            4.36            2.99             2.42            2.20     1.85***
     Source: Eurostat.
     *        Preliminary or most recent.
     **       According to EUROPOP2004, Baseline, data for France refer to metropolitan France only.
     ***      UN data.

     Table 2.1 shows that since the 1970s, all Member States have experienced fertility decline,
     sometimes very substantial and at a fast speed. In Ireland, for instance, the TFR has declined
     since the 1960s by almost 50%. In several of the new Member States, such as Poland, the
     drop was even larger than 50%. Fertility declines were less abrupt in some of the Western and
     Northern Member States. Currently, women in the EU-25 have on average 1.5 children (1.55
     in the old Member States and 1.25 in the new Member States). Despite the fertility decline in
     Ireland, however, this Member State still has one of the highest fertility rates in Europe,
     together with France and Finland, while the Czech Republic, Poland, Slovenia and Slovakia
     have the lowest rates.

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     2.2.2.    Drivers of fertility

     The literature offers basically two types of explanations for the decline in fertility7.
     Economists have proposed a rational choice approach while sociologists have concentrated on
     changes in cultural and individual values.

     The rational choice approach focuses on various mechanisms. Gary Becker8 argued that as
     women become more educated, raising children involves much higher opportunity costs —
     assuming that mothers have to reduce their labour force participation. Richard Easterlin
     highlighted the importance of a positive economic outlook: ‘If the couple’s potential earning
     power is high in relation to aspirations, they will have an optimistic outlook and will feel freer
     to marry and have children. If their outlook is poor relative to aspirations, the couple will feel
     pessimistic and, consequently, will be hesitant to marry and have children9’. A third major
     rational choice fertility theory proposed by David Friedman focuses on the economic value of
     children. The idea here is that people have a larger number of children to reduce uncertainty
     in their future lives. Social protection arrangements, however, limit uncertainty and reduce the
     economic rationale for having a large number of children, which we still see in many non-
     European countries where population-wide social protection systems do not function properly.

     Sociologists have often challenged or complemented the rational choice approach to fertility.
     Dirk van de Kaa and Ronald Lesthaeghe have proposed complementing the rational approach
     by paying more attention to the dramatic changes in individual values and behaviour that have
     taken place since the 1960s. Only by understanding the newly acquired autonomy of the
     individual can one comprehend current family formation decisions10. Van de Kaa and
     Lesthaeghe postulate a Second Demographic Transition (SDT) characterised by new patterns
     of behaviour in terms of living arrangements (single living, pre- and post-marital cohabitation,
     delayed fertility, high prevalence of non-marital fertility and high rates of divorce) and new
     individual values with respect to family and fertility behaviour. Table 2.2 illustrates how these
     values have changed in Western Europe in the process of moving from the first to the second
     demographic transition in table 2.2 below.

     7        See also Liefbroer, A. C., ‘The impact of perceived cost and rewards of childbearing and entry in
              parenthood: evidence from a panel study’, European Journal of Population, 2005.
     8        Becker, G.S., A Treatise on the Family, Harvard University Press, Cambridge MA, 1981.
     9        Easterlin, R.A., Birth and Fortune: The impact of numbers on personal welfare, Basic Books, New
              York, 1980.
     10       Van de Kaa, D. J., ‘Europe’s second demographic transition’, Population Bulletin, No 42, 1987,
              pp. 1-57.

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     Table 2.2 Overview of demographic and societal characteristics related to FDT and
     SDT in Western Europe

                               FDT                                                              SDT

                                                              A. Marriage

           •    Rise in proportions marrying, declining              •    Fall in proportions married, rise in age at first
                age at first marriage                                     marriage
           •    Low or reduced cohabitation                          •    Rise in cohabitation (pre- & post-marital)
           •    Low Divorce                                          •    Rise in divorce, earlier divorce
           •    High remarriage                                      •    Decline of remarriage following both divorce and
                                                               B. Fertility

           •    Decline in marital fertility via reductions          •    Further decline in fertility via postponement,
                at older ages, lowering mean ages at                      increasing mean age at first parenthood, structural
                first parenthood                                          subreplacement fertility
           •    Deficient contraception, parity failures             •    Efficient contraception (exceptions in specific social
           •    Declining illegitimate fertility                     •    Rising extra-marital fertility, parenthood within
           •    Low definitive childlessness among                   •    Rising definitive childlessness in unions
                married couples
                                                       C. Societal background

           •    Preoccupations with basic material                   •    Rise of ‘higher order’ needs: individual autonomy,
                needs: income, work conditions,                           self-actualisation, expressive work and socialisation
                housing, health, schooling, social                        values, grass-roots democracy recognition.
                security. Solidarity prime value                          Tolerance prime value.
           •    Rising memberships of political, civic               •    Disengagement from civic and community oriented
                and community oriented networks.                          networks, social capital shifts to expressive and
                Strengthening of social cohesion                          affective types. Weakening of social cohesion
           •    Strong normative regulation by State                 •    Retreat of the State, second secularisation wave,
                and Churches. First secularisation                        sexual revolution, refusal of authority, political
                wave, political and social ‘pillarisation’                ‘dépillarisation’
           •    Segregated gender roles, familistic                  •    Rising symmetry in gender roles, female economic
                policies, ‘embourgeoisement’,                             autonomy
                promotion of breadwinner family model
           •    Ordered life course transitions, prudent             •    Flexible life course organisation, multiple lifestyles,
                marriage and dominance of one single                      open future
                family model

     Source: Lesthaeghe R and Surkyn J, 2007, 'When history moves on: the foundation and diffusion of a second demographic transition',
     forthcoming in Jayakodi, R.; Thornton, A.; Axinn, W. (Eds), International Family Change — Ideational Perspectives. Mahwah, New
     Jersey: Lawrence Earlbaum & Associates.

     It is far too early to tell whether the second demographic transition will be as universal as the
     first demographic transition. If it is mainly driven by changes in values, it could be less
     permanent and more specific to individual countries. However, birth rates far below
     replacement levels have also been observed in the most developed Asian countries.

     2.2.3.      Tempo and quantum effects on fertility rates

     The most common used period indicator for fertility is the Total Fertility Rate (TFR), which is
     based on age specific fertility rates in a particular year. The TFR indicator has to be regarded
     as an estimate or a projection to the extent that it is based on the assumed future fertility
     pattern of younger women as derived from the probability of giving birth observed among
     current older cohorts of women. The effects of changes in current fertility patterns on future
     fertility probabilities are not taken into account. Thus, when more and more women are

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     postponing births, the TFR will inevitably go down initially (tempo effect), even though the
     likelihood of having children at a later age would go up if these women still wished to have
     the same number of children (quantum effect). Once the general process of postponement in a
     country has stopped, the TFR will go up again. The sensitivity of the TFR to postponement
     (and the opposite catching-up effect) causes the TFR to be a volatile and unstable indicator.

     In most EU countries, however, the postponement of childbearing does appear to result in
     reduced average fertility for the cohort as a whole. The share of children without siblings
     appears to be increasing, and childlessness among women in their 30s and 40s is becoming
     more frequent.

     Cohort fertility rates, which are known only at the end of a cohort’s fertile life span, are a
     more stable indicator of long-term trends as they are not affected by differences in the timing
     of children (postponement). Cohort fertility turns out to be only slightly higher than the period
     rates, which suggests that postponement is still reducing TFR. However, an obvious problem
     in using cohort rates is that they are not available for (younger) cohorts that have not yet
     reached the end of their fertile life span, so do not allow a timely observation of fertility
     trends. The latest available average cohort fertility rates for the generations of women born in
     1955 and 1965 in the EU-25 — 1.94 and 1.77, respectively — also confirm that fertility has
     now dropped below the replacement level.

     In the EU, the fertility rates of women aged younger than 30 years have declined since the
     1970s, while the fertility rates of women over 30 have risen since the 1980s, which is a clear
     indication of postponement. Since 1980 the average TFR has declined by 0.4 children per
     woman. During the same period the mean age at childbearing has risen by 2 years to 29 years.
     In recent years the decline in fertility rates at young ages appears to have slowed down in
     many Member States and even stopped in several countries. As a consequence, the decline in
     the total fertility rate (TFR) has also slowed down or even turned into a slight increase. In
     some countries, the rise in fertility at older ages has slowed down, suggesting that in these
     countries the ‘catching-up phase’ is near its end, but in most countries a strong increase in
     fertility at ages 30 or more is still going on, suggesting that the TFR in these countries may
     increase in the coming years. Fertility is therefore likely to recover in Member States where it
     is below average (due to the tempo effect), particularly in the new Member States11.

     While a reversal in TFR trends can be expected in a number of Member States, there is
     nevertheless concern that very low fertility rates could persist. Lutz, Skirbekk and Testa warn
     in a recent paper12 of a low fertility trap resulting from a self-reinforcing mechanism. Their
     low fertility trap hypothesis (LFTH) has three components: a demographic one based on the
     negative population momentum, i.e. the fact that fewer potential mothers in the future will
     result in fewer births; a sociological one saying that the ideal family size for the younger
     cohorts is declining as a consequence of the lower actual fertility observed among previous
     cohorts; and an economic one based partly on Easterlin’s relative earnings power hypothesis,
     saying that the aspirations of young people are increasing while their expected income may be
     declining as a consequence of the rising cost of population ageing.

     11     De Beer, P., An assessment of the tempo effect for future fertility in the EU, European Observatory on
            the Social Situation, the demography network (forthcoming), 2006.
     12     Lutz, W., Skirbekk V. and M. R. Testa, ‘The low-fertility trap hypothesis: forces that may lead to
            further postponement and fewer births in Europe’, Vienna Institute for Demography (VID) research
            paper, No 4, 2005.

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     Together, these three factors could trigger a downward spiral, particularly in those countries
     where the TFR currently lies significantly below 1.5 births per woman

     2.2.4.    Results of the 2006 Eurobarometer on fertility and ageing13

     Both the SDT and the LFTH suggest that people now have different values and life styles and
     have become less interested in having children. A Eurobarometer (EB) survey carried out in
     2006 checked whether Europeans have indeed become less interested in children. The survey
     confirmed the generally positive attitude of Europeans towards childbearing that was first
     found in the 2002 EB survey. The two-child family remains the most common aspiration of
     Europeans. The mean ideal number of children is 2 or slightly higher, both for men and
     women as well as for each age group. Austria and Romania are the only European countries
     with ideals below the replacement level among young female and male cohorts. This picture
     remains largely unchanged when we look at the ideals that people have for their own family
     size, rather than general ideals., As is normal, however, ideals are somewhat removed from
     reality: when one adds up the number of children already born and the number people still
     intend to have, for women in the prime reproductive ages, several countries have averages of
     less than 2 (Austria, Romania, Spain, Italy, Slovakia, Germany, Malta, and the Czech
     Republic) — see Figures 2.1 and 2.2.

     Women would not only like to have more children than they actually have, they would also
     prefer to have their children somewhat later in life than they actually do (half a year later on
     average). This confirms that the tempo effect could still be relevant. The age indicated as the
     latest ages to start having children is 41 for a woman and 46 for a man, despite the fact that
     female biological fertility, on average, starts to decline rapidly after the age of 3514.

     The most relevant conditions considered as a prerequisite for having children are the health of
     the two partners (75% for the mother’s health and 68% the father’s health among men, and
     77% for the mother’s health and 66% the father’s health among women), the presence of a
     supportive partner (72% overall), a good working situation of the father (61% and 62%
     among female and male respondents, respectively), the financial situation (60% overall), and
     the availability of appropriate housing conditions (55% among men and 59% among women).

     The importance of the role of both partners for a good family life and particularly for raising
     children is recognised, but the role of mothers is still considered more crucial. The
     predominant opinion is that men and women should both contribute to the household income,
     although fathers should not concentrate too much on their jobs according to almost 80% of
     respondents of childbearing age in the EU-25. Half of respondents also believe that mothers
     should not work too much, fearing that family life would suffer if they have a full-time job,
     while more than half of the respondents are convinced that children of pre-school age would
     suffer if their mother went out to work. A large majority of Europeans (around 70%) feel,
     however, that a working mother is able to establish just as warm a relationship with her
     children as a non-working mother.

     13       Testa M. R. ‘Childbearing preferences and family size issues in Europe’, VID Report on the special
              Eurobarometer, No 253, wave 65.1 and 65.31, TNS Opinion & Social for the EC, 2006.
     14       On average female fertility begins to decline slightly at 30, the decline becoming very strong after 35
              and infertility usually setting in at 41. See Te Velde, E.R. and P.L. Pearson, ‘The variability of female
              reproductive ageing’, Human Reproduction Update, 8th year, 2002, pp. 141-154.

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     Figure 2.1 Childless women, and childless women not intending to have any children,
     by country, ages 25-39



                   0,0           10,0                   20,0                     30,0                    40,0                     50,0   60,0

                                    Childless women not intending to have a child   Childless women still considering having a child

     Source: ‘Childbearing preferences and family size issues in Europe’ by M.R. Testa, results of the 2006 Euro Barometer on fertility and
     Note: Own adaptation of Figure 21 in the report.

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     Figure 2.2 Mean actual and ideal number of children, by country. Women aged 25 to 39

     Source: ‘Childbearing preferences and family size issues in Europe’ by M.R. Testa, results of the 2006 Euro Barometer on fertility and

     BOX 2.1 Towards a better understanding of fertility determinants: A major new survey

     The Eurobarometer is a very useful instrument to monitor public opinion but its rather small
     sample size (only 1000 respondents per Member State) makes it unsuitable for a more
     rigorous scientific analysis of fertility. A few years ago the United Nations Economic
     Commission for Europe (UNECE) took the initiative of collecting a new major international
     data set with a sample size of around 10.000 persons per country to allow for a more
     structural and in-depth analysis of fertility. The project is called the Generations and Gender
     Project (GGP)15 and will be used to study relationships between parents and children
     (generation) and between adults (gender). Participation is voluntary, but already 17 EU
     Member States have signed up or are thinking of participating in the near future.

     15        See for more information

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     2.3.        Longevity

     2.3.1.      Main trends in longevity

     Decreasing mortality at more advanced ages has become an important driver behind
     population ageing. Table 2.3 presents an overview of the trend in life expectancy at birth for
     men and women in the EU-27 plus Croatia and Turkey. Declining mortality results in the
     extension of life span, measured as the average life expectancy at birth, which is the number
     of years newborn babies may expect to live after going through the different stages of the life
     cycle at the currently prevailing mortality rates for each of these stages.

     Table 2.3 and 2.4 show that on average for the EU-25, European women may expect to live
     81.8 years while the life expectancy for men is 75.6 years. Life expectancy is generally higher
     in the old Member States (82.4 and 76.7 for women and men, respectively) than in the new
     Member States (78.7 and 70.4 for women and men). The Baltic States report the lowest life
     expectancies along with very large gender differences (around 77 years for women and 65 for
     men). Relatively large gender differences are also reported for France and Spain (7-8 years).
     Overall, gender differences in mortality are nevertheless declining in the EU-25, as male
     mortality rates are falling to the levels observed for women.

     Table 2.3 Life expectancy, men
                         1960/64          1970/74         1980/84          1990/94          2000/03      2004*   2050**
     EU-25                 67.3            68.5             70.3             72.1             74.7       75.6     81.8
     EU-15                 67.6            68.9             71.0             73.2             75.8       76.7     82.3
     NMS-10                65.6            66.4             66.4             66.2             69.4       70.4     78.7
     BE                    67.7            67.8             70.0             73.0             75.1       75.9     82.3
     CZ                    67.5            66.6             67.1             68.6             72.0       72.6     79.7
     DK                    70.4            70.7             71.2             72.5             74.7       75.2     80.9
     DE                    66.9            67.3             69.6             72.5             75.4       75.7     82.0
     EE                    64.3            65.8             64.4             63.3             65.3       66.0     74.9
     EL                    67.3            70.1             72.2             74.8             75.4       76.6     80.3
     ES                    67.4            69.2             72.5             73.7             76.1       77.2     81.4
     FR                    66.9            68.4             70.2             73.2             75.6       76.7     82.7
     IE                    68.1            68.8             70.1             72.5             74.8       75.8     82.4
     IT                    67.2            69.0             70.6             74.0             76.8       76.8     83.6
     CY                     :              70.0             72.3             74.4             76.1       77.0     81.9
     LV                    66.1            65.4             64.0             62.1             65.0       65.5     74.3
     LT                    66.6            66.9             65.7             64.5             66.4       66.4     75.5
     LU                    66.5            67.1             69.1             72.3             75.0       75.0     81.6
     HU                    66.4            66.5             65.4             64.8             68.1       68.6     78.1
     MT                    67.1            68.5             69.7             74.0             76.1       76.7     81.8
     NL                    71.5            70.7             72.7             74.1             75.9       76.4     80.2
     AT                    66.2            66.5             69.4             72.6             75.6       76.4     83.6
     PL                    65.1            67.0             67.0             66.9             70.2       70.2     79.1
     PT                    61.2            64.2             67.7             70.8             73.6       74.2     80.4
     SI                    65.6            65.9             67.2             69.6             72.4       72.6     79.8
     SK                    68.4            66.8             66.8             67.5             69.7       70.3     77.7
     FI                    65.5            66.5             69.2             70.8             74.7       75.3     81.9
     SE                    71.5            72.1             73.0             75.3             77.7       78.4     83.3
     UK                    67.9            68.7             70.2             73.4             75.9       76.2     82.9
     BG                    68.5            69.3             68.9             68.1             68.6       68.9     78.2
     RO                    65.1            66.5             66.8             66.2             67.6       67.7     77.6
     HR                    64.3            65.7             66.6             68.6             71.0       72.0       77.8***
     TR                      50.3***         55.0***          59.0***          64.0***        66.4       68.8       75 2***
     Source: Eurostat.
     *         Preliminary or most recent.
     **        According to EUROPOP 2004, Baseline, data for France refer to metropolitan France only.
     ***       UN Data.

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     Table 2.4 Life expectancy, women

                        1960/64*         1970/74          1980/84         1990/94          2000/03       2004**   2050***
     EU-25                73.0            75.0             77.2             79.1             81.0         81.8     86.9
     EU-15                73.2            75.3             77.7             79.8             81.6         82.4     87.4
     NMS-10               71.6            73.4             74.7             75.3             78.1         78.7      84.1
     BE                   73.5            74.2             76.8             79.8             81.2         81.7     88.3
     CZ                   73.4            73.5             74.3             76.0             78.5         79.0      84.1
     DK                   74.4            75.9             77.3             77.9             79.4         79.9     83.7
     DE                   72.4            73.6             76.1             79.0             81.2         81.4     86.8
     EE                   71.6            74.6             74.4             74.4             76.7         76.9      83.1
     EL                   72.4            73.8             76.8             79.8             80.7         81.4      85.1
     ES                   72.2            74.8             78.6             80.8             83.2         83.8     87.9
     FR                   73.6            75.9             78.4             81.3             82.9         83.8      89.1
     IE                   71.9            73.5             75.6             78.1             79.9         80.7     86.9
     IT                   72.3            74.9             77.4             80.5             82.4         82.5     88.8
     CY                     :             72.9             77.0             78.9             81.0         81.4      85.1
     LV                   73.1            74.7             74.4             73.9             76.2         77.2     82.5
     LT                   77.1            75.5             75.6             75.6             77.5         77.8     83.7
     LU                   72.2            73.4             75.9             79.0             80.9         81.0     86.7
     HU                   70.8             72.3            73.0             73.8             76.4         76.9     83.4
     MT                   70.7            72.6             73.7             78.4             80.7         80.7     85.0
     NL                   75.3             76.5            79.3             80.3             80.7         81.1     83.6
     AT                   72.7            73.4             76.5             79.1             81.5         82.1     87.7
     PL                   71.0            73.9             75.2             75.9             78.5         79.2     84.4
     PT                   66.8             70.8            75.2             77.9             80.3         80.5     86.6
     SI                   72.0            73.4             75.2             77.4             80.1         80.4     85.2
     SK                   73.0            73.4             74.6             76.0             77.7         77.8     83.4
     FI                   72.5            75.0             77.6             79.4             81.5         82.3     86.5
     SE                   75.4            77.5             79.1             80.8             82.2         82.7     86.5
     UK                   73.7            75.0             76.2             78.9             80.5         80.7     86.6
     BG                   72.2            73.7             74.3             74.9             75.4         76.0     82.6
     RO                   69.1            71.0             72.3             73.2             74.8         75.1     82.0
     HR                   69.0             72.3            74.2             76.0             78.1         79.0    83.3***
     TR                  54.0****        592****          63.2****        68.5****           71.0         71.1    80.1****
     Source: Eurostat.
     *         Period average.
     **        Preliminary or most recent.
     ***       According to EUROPOP 2004, Baseline, data for France refer to metropolitan France only.
     ****      UN data.

     2.3.2.      Expected trends in longevity

     Future increases in life expectancy will depend mostly on declining mortality at higher ages.
     This translates into increasing life expectancy aged 60. Current mortality rates imply that a
     European man at age 60 has an additional 15 years to live, which is 20% of his total life span.
     A 60 year-old European woman may expect to live an additional 20 years which is 25% of her
     total life span.

     A major question is whether the future increase in life expectancy will consist of years in
     good health. This would allow older people to remain active on the labour market longer and
     reduce the period of dependency at the end of the life cycle. Healthy life expectancy adjusts
     life expectancy for time spent in poor health. It should be noted that this indicator is estimated
     on the basis of self-reporting. Cultural differences between countries can make inter-country
     comparisons misleading. Table 2.5 provides an overview of health life expectancy at birth in a
     number of EU countries.

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     Table 2.5 Healthy Life Years - 2003

                                                      Males             Females
                                    EU-15             64.5                66.0 (e)
                                    Euro area            :                   :
                                    BE                67.4 (e)            69.2 (e)
                                    CZ                   :                   :
                                    DK                63.0 (e)            60.9 (e)
                                    DE                65.0 (e)            64.7 (e)
                                    EL                66.7 (e)            68.4 (e)
                                    ES                66.8 (e)            70.2 (e)
                                    FR                60.6 (e)            63.9 (e)
                                    IE                63.4 (e)            65.4 (e)
                                    IT                70.9 (e)            74.4 (e)
                                    CY                 68.4                69.6
                                    HU                53.5 (p)            57.8 (p)
                                    MT                   :                   :
                                    NL                61.7 (e)            58.8 (e)
                                    AT                66.2 (e)            69.6 (e)
                                    PL                   :                   :
                                    PT                59.8 (e)            61.8 (e)
                                    FI                57.3 (e)            56.5 (e)
                                    SE                62.5 (e)            62.2 (e)
                                    UK                61.5 (e)            60.9 (e)
                                    HR                   :                   :
                                    IS                   :                   :
                                    NO                66.3 (p)            64.2 (p)
     Source: Eurostat New Cronos.
     (:)      Not available.
     (e)      Estimated value.
     (p)      Provisional value.

     Since 1980 the average annual increase in life expectancy at birth in the EU-25 countries has
     been slightly under 2.5 months. There is general agreement among demographers that life
     expectancy will continue to rise, but there is no agreement on how fast and to what level16.
     Some experts expect that life expectancy will continue to rise by 2 years per decade. They see
     no reason why this linear increase should ever stop. Others expect that the increase will slow
     down once a biological limit is reached. In addition, public health problems could also slow
     down or even reverse the trend towards a higher life expectancy. In several EU Member
     States, the average annual increase in life expectancy has been lower in recent years than in
     the previous decades. Another relevant issue is whether or not differences in life expectancy
     across European countries will become smaller. The latest population projection of Eurostat
     assumes that by 2050 life expectancy in the EU-10 will converge towards the level of the EU-
     15, but a considerable gap of 3 to 4 years is projected to remain.

     One important factor explaining the increase in life expectancy during the last decades has
     been the strong decrease in mortality from cardiovascular diseases at late middle age. With
     most people now surviving to old age, any further substantial increases in life expectancy can
     only be achieved through a major reduction in mortality at advanced ages. Death at advanced
     age often cannot be attributed to one single disease, but rather to a general state of frailty

     16       This section is based on: “Future trends in mortality and life expectancies in the European Union”,
              2006, a policy brief prepared by Paul de Beer of the DEMO network of the SSO (forthcoming).

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     leading to what is termed ‘co-morbidity’. Medical advances in the treatment of one disease
     may therefore lead to only a limited gain in lifespan as very old patients may die from another

     Moreover, whereas medical progress and improved living conditions have led, and probably
     will continue to lead, to an increase in life expectancy, it is much more uncertain what the
     effect of lifestyle (smoking, diet, physical exercise, use of alcohol) will be. The decline in
     smoking since the 1970s and 1980s has had a favourable impact on life expectancy but the
     current increase in the prevalence of obesity may well have an adverse effect. Thus, even
     though medical advances may contribute to a further rise in life expectancy, unhealthy
     behaviour may have the opposite effect. Moreover, the effect of accumulating environmental
     risks is difficult to take into account. The latest 2005 figures from Latvia and Lithuania
     showed a drop in life expectancy. This shows that a downturn in life expectancy is still a real
     risk in some Member States.

     2.3.3.    Important longevity differences between socio-economic groups17

     The clearest and most striking difference in life expectancy is between men and women. In
     2004, men in the EU-25 had a life expectancy 6 years shorter than that of women. By 2050
     this gap is expected to have the narrowed by one year but the motto that ‘men die quicker but
     women are sicker’ continues to apply as women have lower mortality risks but higher risks of
     disability when growing older.

     The main causes of death of persons over 65 are cancer and cardiovascular disease, together
     accounting for three quarters of all deaths in almost every European country. Given that the
     incidence of most chronic conditions rises with age, older people often suffer from several
     chronic conditions at the same time, requiring complicated and labour-intensive long-term
     care solutions. A still largely underestimated chronic condition affecting 10-15% of persons
     over 65 in Europe is depression. Older people suffering from depression are more likely to
     have multiple chronic illnesses and more likely to face limitations in their daily living.
     Depression is also a major cause of suicide among older Europeans.

     A large part of the observed differences in life expectancy between EU-15 and EU-10
     countries is due to preventable mortality (from causes that can be avoided by effective
     intervention, e.g. lifestyle factors or accidents) or treatable mortality (caused by conditions for
     which effective medical treatments are available). Persons with a lower socio-economic status
     and/or education have on average a lower life expectancy which to a large extent can be
     explained by the basis of structural factors such as a more stressful life and an unhealthier
     lifestyle. Good health in old age is the result of genetic predisposition as well as lifestyle
     factors such as healthy diet, refraining from smoking, engaging in physical exercise and
     avoiding excessive alcohol use.

     17       This section summarises some of the conclusions that can be found in the ‘The State of ageing and
              health in the EU’ by the International Longevity Centre-UK and The Merck Company Foundation, June

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     2.4.     Migration

     2.4.1.   Overview of migration trends

     The third main driver of demographic change — and in our developed societies also the most
     volatile one — is international migration. In the second half of the 20th century, large parts of
     Europe witnessed a historical change from emigration to immigration. The exact number of
     migrants residing in Europe is unknown, partly due to the fact that many European countries
     collect data on nationality rather than the place or country of birth, thus making it impossible
     to identify first-generation immigrants after they have obtained the citizenship of their host

     For the year 2005, the United Nations has estimated that there are about 40 million migrants
     in the EU-27 Member States — see Table 2.6. About 3% of these migrants are refugees.
     Europe has a much higher share of migrants (8.8%) in its total population of 728 million than
     is generally found in the less developed regions of the world (1.4%) while the opposite is true
     for refugees. In 10 EU Member States, the share of the foreign-born population is estimated to
     be higher than 10%.

     Table 2.6 International Migration
                                                                                 Net Migration Average
                               Migrant Stock 2005            Refugees 2004
                                             % of
                          Number*1000                        Number*1000     Number*1000    % of population
     Developed regions      115397             9.5               2701           2622               2.2
     Less developed
                             75237             1.4              10768           -2622             -0.5
     EU-27                   39593             8.3               1663           1155               2.4
     BE                       719              6.9                14             13                1.3
     CZ                       453              4.4                 1             10                1.0
     DK                       389              7.2                65             12                2.3
     DE                      10144            12.3               877             220               2.7
     EE                       202             15.2                0              -2               -1.5
     EL                       974              8.8                2              36                3.2
     ES                      4790             11.1                6              405               9.7
     FR                      6471             10.7               140             60                1.0
     IE                       585             14.1                7               39               9.8
     IT                      2519              4.3                16             120              2.1
     CY                        :                :                  :               :                :
     LV                       449             19.5                0               -2              -1.0
     LT                       165             4.8                 0              -4               -1.2
     LU                       174             37.4                2               4               8.7
     HU                       316              3.1                8              10               1.0
     MT                       11               2.7                2               1                2.8
     NL                      1638             10.1               127             30                1.9
     AT                      1234             15.1                18             20                2.5
     PL                       703              1.8                3              -16              -0.4
     PT                       764              7.3                0               50              4.8
     SI                       167              8.5                0                2              1.0
     SK                       124              2.3                0               1                0.2
     FI                       156              3.0                11              8                1.6
     SE                      1117             12.4                73             31                3.5
     UK                      5408              9.1               289             137              2.3
     BG                       104              1.3                5              -10              -1.3
     RO                       133              0.6                2              -30              -1.4

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     Source: United Nations, Department of Economic and Social Affairs, Population Division, 2006.

     Figure 2.3 shows that net migration into the EU reached a peak of almost 2 million in
     2003/2004. Figure 2.4 shows the main destinations of the migration flows. The flows for Italy
     and Spain, which accounted for almost two thirds of the total, were heavily impacted by
     decisions to regularise illegal migrants. If immigration were to remain at this high level, then
     the EU’s working age population would continue to grow until around 2030, rather than
     already starting to decline in 2011, as is currently assumed in the baseline scenario of the
     Eurostat population projection.

     Movement of persons inside the EU could potentially also affect demographic development in
     individual Member States. The recent enlargements of the European Union have led to a
     short-term increase in migration from the new Member States in particular towards the UK
     and Ireland (see section 4.5 for more discussion of this topic).

     Figure 2.3 Net migration into the EU-25 (projected from 2005)

     Source: Eurostat, National data.
     Notes: Net migration is defined as the population change not attributable to births and deaths. Direct observations of
     immigration or emigration flows are not available or not sufficiently precise. Corrections to population figures are included in
     this indicator.

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     Figure 2.4 Annual Crude Net Migration Rate (Average 2001-2004, in thousands)

     Source: Eurostat, National data.

     The ageing of the population also entails the ageing of the workforce, as well as an imminent
     decline in both the workforce and the population. According to the latest Eurostat population
     projection, the population aged 15-64 is going to decrease by one million annually after 2010.
     These trends are likely to generate major labour market bottlenecks and skills shortages,
     which will act as a major pull factor for international migration into the European Union. At
     the same time, the continuing high population growth in Europe’s neighbourhood, especially
     in Africa, combined with poor economic performance and political instability, could act as a
     strong push factor. Figures from the year 2000 show a total GDP for the EU almost 10 times
     greater than the combined GDP of sub-Saharan Africa. In comparison, GDP for North
     America was approximately 3 times larger than that of Central and South America.

     More migration is also likely to follow as a result of globalisation and the creation of trans-
     national communities. Interestingly, the gender imbalance in international labour migration
     seems to be shifting, with male domination (around two thirds) falling in most countries,
     signalling the pull effect of the increasing feminisation of labour markets in the developed

     2.4.2.     Relative contribution of migration and fertility to population growth

     Although international migration may play a crucial role in solving future labour market
     shortages, its impact on population ageing is likely to be small. Scenario calculations by the
     United Nations have shown that to halt, let alone reverse, population ageing, truly massive
     and increasing flows of young migrants would be required18. For example, to keep the age
     structure in Germany unchanged, over 3 million migrants per year would have to be admitted.
     Clearly, increased immigration cannot prevent ageing, but it can realistically contribute to
     alleviating labour market bottlenecks. Furthermore, a comparison between the natural rate of

     18        ‘Replacement migration: is it a solution to declining and ageing populations’, UN population division,
               New York, 2000,

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     population growth and the migration rate in Figure 2.5 shows that in several Member States,
     immigration has already been helpful in postponing population decline.

     Figure 2.5 Net Migration and Natural Population Growth (average 2001-2004)

     Source: Eurostat 2005.
     Note: Figures exclude intra-EU flows and include regularisations of previously undeclared migrants.

     Scenario calculations that compare the outcomes for different assumptions show the relative
     importance of changes in fertility versus migration for the future changes in the population.
     For example, Eckart Bomsdorf and Bernard Babel have conducted an interesting sensitivity
     analysis for Germany19. They find that a total extra increase in the German population of 2.5
     million by 2050, as compared to the baseline scenario, which assumes a decline of 12 million
     with other factors remaining unchanged, could be achieved in any of the following three

     - An increase in the TFR by 0.1 (which in 2003 stood at 1.35);

     - An increase in life expectancy by 2.67 years (which in 2003 stood at 75.3 and 81.3 for men
     and women respectively);

     - An increase in annual net migration by 45.000 persons (which in 2003 stood at 150.000).

     Table 2.7 below compares the results for fertility and migration in a comparative way.

     Table 2.7 Change in the German population by 2050 (in 1000 persons) compared to the
     baseline projection, due to a 10% or 20% change in fertility and in net migration

                 Change in %                         -20%               -10%               10%             20%
                 - in the Fertility rate            -6117              -3122               3248            6623

     19       Bomsdorf E. and B. Babel, ‘Wie viel Fertilität und Migranten braucht Deutschland?’, HWWA, 85th year,
              Vol. 6, June 2005.
     20       For reasons of simplicity the effect of the change in base (‘Sockel’) migration was ignored. This effect
              is relatively small and results from the average age of emigrants being higher than those of immigrants.

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                - in the Net migration               -1688        -844    844          1688
     Source: Bombsdorf and Babel, see footnote 19.

     These scenario calculations forcefully illustrate that, over several decades, even small changes
     in fertility can have a sizeable impact on future demographic development.

     2.5.       Cohort effects: the baby boom

     Demographic developments are also strongly influenced by variations in cohort sizes. The
     large cohorts that were born between 1945 and 1965, in what is known as the ‘baby boom’,
     form a large bulge in the population that is gradually working its way through the overall age
     structure. At present, the baby boom cohorts are still part of the working age population,
     which, as a result, currently represents a large proportion of the total population. The share of
     the European population in working age is expected to peak at 67% by the end of 2010. The
     fact that large cohorts boost the working age population has been described as a demographic
     dividend21. The retirement of the baby boomers will compound the increase in the old-age
     dependency ratio (i.e. the number of persons over 65 divided by the number of people aged
     between 15 and 64) which results from rising life expectancy and low fertility rates. Figure
     2.6 below presents the differences in the annual growth rates of the total population and the
     population of working age for a number of European countries. After 2010 the difference in
     most countries will turn negative, signalling the end of the demographic dividend. The baby
     boom in Southern Europe emerged later than in Northern and Western Europe as a result of
     which the boost in the working age population was delayed. In all three parts of Europe it is
     expected that the difference in growth rates will turn negative after 2010. The baby boom
     effect in the Central European Member States has come later and been somewhat more

     21       See also the VID/IFS ‘Walter’ demographic impact study.

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     Figure 2.6 Difference between the growth rate of the working age and total
     populations, 1951-2050

     22   Prskawetz, A., Th. Lind et al. ‘The relationship between demographic change and economic growth in
          the EU’, VID and IFS (Institute for Future Studies), ‘Walter’ demographic impact study, forthcoming,

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     Source: A. Prskawetz, 2006, see footnote 22.

     2.6.       The EU-27 population projection

     The results of the latest Eurostat population projection for the EU-2723 are based on a series of
     assumptions about future trends in fertility, mortality and migration. The total population for
     the EU-27 is projected to shrink from 486.3 million in 2004 to 472.2 million in 2050. Figure
     2.7 below shows how the form of the age pyramid is expected to change as the bulge
     representing the baby-boom cohorts becomes older.

     23       Aggregate projections were originally only presented for the EU-25, but will be adjusted to the EU-27
              to the extent feasible.

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     Figure 2.7 Age pyramids for the EU-25 population in 2004 and 2050

         Age                                                 2004
            5000       4000        3000       2000          1000        0            1000     2000    3000      4000

                                               Males                        Females

         Age                                                 2050
            4000         3000        2000            1000           0         1000          2000     3000       4000

                                               Males                        Females

     Source: Economic Policy Committee and European Commission, population in 2050 according to the Ageing Working
     Group Scenario (2006).

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     Fertility rates in the baseline scenario are assumed to rise from 1.5 in 2004 to 1.6 by 2030
     and to stay constant around that level until 2050. Fewer births eventually translate into
     smaller cohorts of young persons entering the labour market, especially when compared with
     the much larger older cohorts leaving for retirement.

     Life expectancy at birth has increased by 8 years since 1960 and is assumed in the
     projections to rise by 6.3 years for males to 81.7 and by 5.1 years for females to 86.8 between
     2004 and 2050. Moreover, longer life expectancy will dramatically increase the numbers of
     persons reaching very old ages (80+) from 18 million in 2004 to nearly 50 million in 2050. By
     2050 the differences in life expectancy between the old Member States (87.3 and 82.3 for
     women and men respectively) and the new Member States (84.1 and 78.6 respectively) are
     predicted to become smaller, especially for men.

     Net migration inflows are assumed on average to fall from an estimated 1.3 million people in
     200424 to some 800.000 people annually between 2015 and 2050 (an annual net migration rate
     of 0.2% of the population). Although net inflows of migrants are projected to accumulate to
     some 40 million people between 2004 and 2050, they are insufficient to prevent population
     decline, let alone stabilise the age structure of the population. These demographic forces will
     cause the total population in the EU-27 in 2050 to be slightly smaller and much older.

     2.6.1.    Changes in the population structure

     According to the baseline projection the median age in the EU will increase from 39 to 49
     years between 2004 and 2050. The number of young people (age 0-14) in the European Union
     will continue to decline in absolute terms from around 100 million in 1975 to some 66 million
     by the year 2050. Their share relative to the working-age population (the young-age
     dependency rate) will, however, rise slightly from currently 24% to 26% in the EU-25.

     The population of working age (15-64) will be most numerous around the year 2010 (331
     million) and will subsequently decline to about 268 million by 2050. The population aged 65
     and over will continuously increase from currently 86 million to 141 million by 2050. Its size
     relative to the working age population in the EU-25 (the old-age dependency rate) has
     increased from 20% in 1975 to currently 25%. It is projected to double to 51% by 2050. This
     means that the EU will move from having four to only two persons between 15 and 64 for
     every citizen aged 65 or above. See also Table 2.8 below.

     24       Actual realised net migration into the EU was almost 2 million due to large regularisations in Spain and

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     Table 2.8 Population in three age groups, absolute numbers (millions)

                                             1975         2005      2050    2050/1975

                                                       0-14 years
                         EU-15               82.8         61.5      58.2      0.70
                         EU-25               98.9         73.4      66.5      0.67
                         NMS-10              16.1         11.9       8.3      0.52

                                                      15-64 years
                         EU-15               220.2       256.5      218.3     0.99
                         EU-25               265.8       308.9      253.4     0.95
                         NMS-10              45.6        52.4       35.1      0.77

                                                       65+ years
                         EU-15               45.5         66.8      110.7     2.43
                         EU-25               52.9         77.0      129.1     2.44
                         NMS-10               7.4         10.2      18.4      2.49
     Source: 2005 Demographic monitor of the SSO.

     Ageing is not going to affect the Member States of the EU in a uniform way. Figure 2.8
     shows that there are relatively young and old Member States. Moreover, a ranking of Member
     States by the old-age dependency ratio, as in Figure 2.8, reveals significant changes reflecting
     in particular the differences in assumed fertility rates.

     Figure 2.8 Projected old-age dependency ratio by Member State for selected years,
     ‘baseline’ variant of the Trend scenario

     The relative share of the population aged 80 and over to the working age population will
     increase even more sharply: from the current 6% in the EU-25 to 20% by 2050.

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     2.6.2.    Projection methods25

     Currently the most popular way of handling uncertainty is to present alternative variants (e.g.
     high and low fertility) around a baseline scenario or benchmark projection. This scenario
     approach was also used by Eurostat for its latest EU population projection in 2004. One can
     then study a given policy problem under each variant.

     It is, a priori, hard to determine what aspects of future demographics should be varied and by
     how much. Alternative scenarios should be based on clearly distinct and plausible
     “storylines”. This would force the user of a projection to choose the picture of the future that
     is considered to be the most plausible. When several parameters are used for projections,
     however, the number of alternative scenarios can become very large and it may not be
     possible to determine which scenario is the most meaningful. Some researchers therefore
     advocate another approach to demographic projections which takes uncertainty about the
     future more explicitly into account. The idea is to do stochastic or probabilistic projections to
     produce a realistic range of different population paths that fall within a meaningful confidence
     interval. Stochastic projections are, however, computationally more demanding and for the
     user more difficult to comprehend.

     BOX 2.2 Base year data problems and high-quality population data

     During the first 20 years of the projection period, projections are quite reliable, in particular
     for the working age population, provided no major mistakes are made in the starting or base
     year. In the previous projection, such mistakes were made in the Spanish base year migration
     data, which made the projection go off the mark within only a few years. This shows that the
     availability of recent high-quality population data is essential for reliable population
     projections. Population registers that cover all the population and are continuously updated by
     legally controlled administrative procedures provide the best basis for such population data.
     Countries relying on censuses are in a weaker position due to errors in both registration and
     the census itself. The main problem in most EU population systems is the recording of ‘out-
     migration’. Because being registered is frequently a precondition for the opening of bank
     accounts, entitlement to subsidised or low-cost social and health services, etc., there are
     incentives for incoming migrants to register in their new country/region/municipality. In most
     cases, however, there are no incentives to deregister at the old place of stay. One solution
     would be to have details of all ‘in-migration’ records in the population registers of destination
     countries/regions/municipalities sent back to the registers of the original place of stay. Such a
     system has been in use within and between the Nordic countries and functions well.

     25       See the ‘Walter’ demographic impact study by ETLA on population projections.

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     2.6.3.     An estimate of projection uncertainty for the EU-25

     How large the uncertainty of a population projection may become after 20 years is shown
     below in Figure 2.9. This is taken from an interesting example of a stochastic projection for
     the EU-25 prepared by IIASA and the VID26. The blue segment indicates the confidence
     interval in 2020, the green segment that in 2030 and the dark yellow segment the one in 2050.
     The population pyramid of 2050 indicates that the projections for the number of persons
     below 30 and over 70 are much more uncertain than for the number of persons of intermediate
     age. The future size of the intermediate age groups is to a large extent, apart from migration,
     determined by the population momentum of those already born. The number of middle-aged
     persons is less vulnerable to mistakes made in fertility and mortality assumptions.

     Figure 2.9 Uncertainty intervals of a probabilistic population projection for the EU 25
     in 2050

     Source: S. Scherbov and M. Mamolo, 2006, Vienna Institute for Demography, see footnote 26.

     26       Scherbov, S. and M. Mamolo, ‘Probabilistic population projections for the EU-25’, VID European
              Demographic Research Papers, No 1, 2006.

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     2.7.    The regional dimension of population change

     While it may still be one or two decades before the impact of ageing becomes clearly visible
     at the level of an entire country, the impact of ageing and population decline (notably due to
     migration) can already be observed at regional level. The main recent trends identified by
     Eurostat27 at regional level can be summarised as follows:

     – In the north-east of the European Union the population is decreasing. Most affected by this
       decline are eastern Germany, Poland, the Czech Republic, Slovakia and Hungary, the three
       Baltic States and parts of Sweden and Finland.

     – Many EU regions have been experiencing a negative ‘natural population change’ since the
       beginning of the decade (i.e. more people have died than have been born). This negative
       pattern predominates in Germany, the Czech Republic, Slovakia, Hungary, Slovenia and
       adjacent regions, as well as in the Baltic States and Sweden to the north and Greece in the

     – Ireland, France, the three Benelux countries and Denmark are mostly experiencing a
       ‘natural increase’ in the population.

     – In some regions, a negative natural change has been offset by positive net migration. This
       is most conspicuous in western Germany, eastern Austria, the north of Italy, Slovenia, as
       well as the south of Sweden and regions in Spain, Greece and the United Kingdom.

     – The opposite is much rarer: in only a few regions (namely in the north of Poland), has a
       positive ‘natural change’ been offset by negative net migration.

     Figures 2.10 and 2.11 below present, respectively, the change in population between 2000 and
     2030 at regional NUTS 2 level for Europe and a breakdown of this change.

     27     Eurostat Statistical Yearbook Regions, 2006.

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     Figure 2.10 Relative change in population 2004-2031

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     Figure 2.11 Components of population change 2004-2030

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     Demographic ageing is especially evident in the predominantly rural regions of some Member
     States, notably Portugal, Spain, Greece, Italy, Germany and France, where the proportion of
     people over 65 is high.Moreover in Germany, the Nordic and Baltic countries and in Southern
     Europe, strong rural-urban migration of females in the economically active age groups results
     in a high degree of “masculinisation” of the rural population28.

     The increasing importance of regional and local public authorities as policy initiators and
     service providers will compel regions to include the effects of long-term population trends in
     their regional medium-term strategies. A number of regions have already been active and are
     at the forefront of strategic thinking and actions in relation to the demographic challenge29.

     The Union’s Cohesion Policy provides a valuable tool for Member States to adapt their
     regional and national economies to the challenges of ageing. The Structural Fund programmes
     and the European Agricultural Fund for Rural Development (EAFRD) have already supported
     many projects addressing aspects of demographic change. These include successful initiatives
     to cope with depopulation in urban, rural and sparsely populated areas, initiatives to
     encourage migration to depopulated areas, fighting discrimination and promoting gender
     equality and making regions more attractive places to live in. Regions which expect their
     population to decline are encouraged to work with support from the Structural Funds on
     policies to mitigate the effects of this anticipated trend and secure the quality of life of the
     remaining population.

     BOX 2.3 The impact of demographic change on a region: the case of the Free State of
     Saxony (Germany)

     A very impressive example of a regional response was given by Georg Milbradt, Prime
     Minister of Saxony, at the First European Demography Forum. The population of Saxony has
     been shrinking since 1967. In 1950, it had 5.7 million inhabitants; in 2005 this number had
     fallen to 4.3 million. The projection for the year 2020 is 3.8 million. After German
     reunification in 1989, the number of births fell by more than 50% and a few years later
     nursery schools, kindergartens and primary schools had to be closed because of a lack of
     children. These small cohorts have now reached the secondary and vocational school age and
     universities will be affected next. Although birth rates have since recovered, they have not
     regained their old level.

     The initial drop in birth rates will in the future be compounded by the exodus of young
     people. Many high-skilled young people, in particular women, are leaving Saxony to study or
     work elsewhere in Germany. The working age population will shrink approximately twice as
     much as the overall population and firms in Saxony are already having problems finding
     sufficient numbers of qualified young professionals to replace retiring staff. The shortage of
     qualified staff is going to get worse during the next three or four years when the large baby

     28     See 'Study on Employment in Rural Areas' (SERA) at
     29     See also the Joint Declaration of European regions ‘Facing demographic change as a regional
            challenge’ presented at the 2006 Forum to Commissioner Spidla,
     30     Based on the presentation of the Prime Minister of Saxony Prof. Georg Milbradt at the First European
            Demography Forum in 2006, see

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     boomer cohorts start to retire. The shortage of qualified labour will hamper Saxony’s
     economic growth prospects.

     The population decline has led to decreasing utilisation of the region’s infrastructure. Already
     more than 400.000 housing units are permanently empty, out of a total of 2.3 million. Water
     and sewage systems are used far below their normal capacity, resulting in hygiene problems
     and increasing costs per capita. The number of elderly persons in institutional care is growing
     rapidly resulting in a sharp increase in health and nursing expenditure. At the same time,
     budget revenue will decrease by nearly a quarter up to 2020. Even though Saxony does not
     intend to take on any new debt from 2007 onwards, public debt per capita is expected to

     However, Saxony has anticipated the negative consequences of ageing and emigration and has
     started to adapt. Mr Milbradt gave two examples. Saxony has started to reconstruct its cities
     by demolishing 50.000 empty housing units, with a target of 250.000 units by 2015. Local
     authorities are required to adjust their urban planning to a shrinking population. Saxony has
     also begun to downsize its administrative structures. Saxony needs to ensure that it remains an
     attractive place for business and to make sure that ‘nobody will fall behind’. The main
     challenge, as Mr Milbradt sees it ‘is to ensure access to education and healthcare all over
     Saxony (...) without producing any additional debts.’

     Mr Milbradt pleaded for a new way of thinking in which the universal growth paradigm is
     replaced by a limited number of strong local growth centres against the backdrop of an
     otherwise shrinking periphery. Only with such a strategy will it be possible to focus the
     limited available resources. Saxony has started to apply a demographic test to all its laws and
     funding programmes. In spite of its shrinking population Saxony hopes to remain one of the
     most dynamic regions in Germany, and, so far, it has been able to maintain its economic

     2.8.      Global demographic trends

     2.8.1.    Europe’s place in the global population

     According to the United Nations, the world’s population increased during the 20th century
     from 1.6 to 6.4 billion. In the next half century the UN expects a further increase to 9.1
     billion31. Demographic shifts will not change the ranking of the major world regions
     according to population size. The EU-25 with 456 million inhabitants currently ranks third
     after China (1.3 billion inhabitants) and India (1.1 billion), followed by the United States with
     300 million inhabitants. In 2050, the EU-25 will still be in third place with 450 million, after
     India (1.6 billion) and China (1.4 billion) and before the United States with 395 million
     inhabitants. But the EU is the only major world region where the total population is projected
     to decline in the coming four decades. In many developing countries, population growth rates
     are still very high due to birth rates well above the replacement level and a very young age
     structure. For this reason, the population in these countries is likely to double over the coming
     decades, which explains why the world population is expected to increase from its current 6.4
     billion to 9.1 billion by 2050. There are, however, more and more countries in which birth
     rates have now fallen well below the replacement level and where the population is ageing

     31       Based on the 2003 UN world population projection. The 2004 update published in 2005 led to only
              small changes.

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     rapidly. For these countries a future of even more rapid population ageing and, in many cases,
     a shrinking total population size is expected. Because of these significantly different trends
     between various parts of the world, there is still simultaneously concern about the negative
     consequences of rapid population growth and, in other parts of the world, about the negative
     implications of rapid population aging.

     The demographic divide does not always coincide with the traditional split between
     industrialised and developing countries. Some developing countries have recently seen very
     rapid fertility declines, and the number of poor countries with sub-replacement fertility is
     increasing. China is the most prominent example: fertility has recently fallen to an (uncertain)
     level between 1.4 and 1.832. Over the next two decades China will see both significant further
     growth and the beginning of significant population ageing, i.e. doubling the present low old-
     age dependency ratio to 15%. However, it is expected to grow by another 200 million people
     due to the momentum caused by the very young age structure, which will lead to a further
     increase in the number of women of reproductive age. At the same time, the one-child family
     policy can be expected to result in a rapidly increasing share of older people in the total

     During the first part of this century a significant number of countries will simultaneously
     experience population growth and aging. This will be the case with the USA which, unlike
     Europe, is expected to continue to grow significantly thanks to high immigration and higher
     birth rates than in Europe.

     Figure 2.12 below illustrates these trends in population growth rates for different parts of the
     world from 1950 to 2050, based on UN data estimates and projections. It shows that Europe
     consistently has the lowest annual population growth rate of all continents, falling from 1%
     per year in 1950 to zero growth at the moment and shrinking at an expected rate of 0.5% by
     2050. The figure also shows that even Africa is beyond its peak in growth rates. North
     America, which saw fairly stable population growth of around 1% from 1965 to the present, is
     expected to decline only moderately in the future. By 2050 the UN expects North America to
     have a higher population growth than Latin America, and higher than the world average.

     32     See also the presentation of Mr Juwei Zhang of the Chinese Institute of Population and Labour
            Economics at the recent Demography Forum

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     Figure 2.12 Average annual population growth rates of selected world regions, 1950-

     Source: United Nations (2003) (medium variant).

     Table 2.9 gives an overview of trends in mortality and fertility in the main regions of the
     world. Over the past half century, life expectancy has increased considerably in all parts of the
     world. Only in Africa has the HIV/AIDS epidemic in particular slowed down the
     improvement in life expectancy. In some of the hardest hit countries there has even been
     population decline. The UN assumes for the future a recovery in Africa, along with a
     continued increase in life expectancy in all parts of the world.

     Table 2.9 Life expectancy at birth and total fertility rates for selected world regions

                        Life Expectancy at Birth (both sexes)                    Total Fertility Rate
     Region            1950-     1975-      2000-      2025-    2045-   1950-   1975-   2000-    2025-   2045-
                       1955      1980       2005       2030     2050    1955    1980    2005     2030    2050
     Africa             37.8      48.2       48.9       57.1     64.9    6.74    6.59    4.91     3.23    2.40
                        42.9      66.4       72.1      75.0     77.7    5.68    3.13     1.78     1.83   1.85
                        39.4      52.6       63.2      69.1     74.0    6.08    5.09     3.25     2.18   1.91
     central Asia
                        45.2      60.6       69.1      75.2     78.0    6.46    5.30     3.45     2.57   2.19
     Europe             65.6      71.5       74.2      78.1     80.5    2.66    1.97     1.38     1.63   1.84
     America &          51.4      63.0       70.4      75.5     78.5    5.89    4.48     2.53     1.98   1.86
                        68.8      73.3       77.4      79.7     81.8    3.47    1.78     2.05     1.96   1.85
     WORLD              46.5      59.8       65.4      70.2     74.3    5.02    3.90     2.69     2.25   2.02
     Source: United Nations (2003) (medium variant).

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     Fertility rates have also declined considerably in all world regions. The European region has
     the lowest TFR at 1.4; Africa is at the other extreme with an average rate still close to 4.9. For
     the coming decades, the UN assumes a continued decline in fertility for the whole world with
     the exception of Europe, where at least a partial recovery is expected from the projections.

     2.8.2.    Population trends and challenges in Europe’s neighbourhood33

     The Mediterranean Sea represents one of the sharpest demographic divides in the world.
     Greece, Italy and Spain, which have among the lowest fertility rates, are ageing rapidly and
     will see their populations shrink, while the countries on the southern rim have some of the
     most rapidly growing populations. Although fertility rates have been falling in Northern
     Africa, its population is still growing fast due to the population momentum generated by the
     very young age structure.

     A comparison of population trends in Italy and Egypt over a 100-year period is very striking.
     In 1950 Egypt had less than half the population size of Italy, but the population grew so fast
     that by the early 1990s both countries were of equal size. Over the coming decades Italy is
     expected to start shrinking, while Egypt will continue its rapid population growth. The
     fertility decline in Egypt seems to have slowed (or even stalled) at a level above three children
     per woman. But even if the decline continues, Egypt’s population may still double so that by
     2050 it is likely to be about three times that of Italy’s.

     On the Eastern border of the EU the situation is very different (see Table 2.10 below). There
     are huge income differences compared with the EU but the demographic trends are quite
     similar. In most eastern European countries, the political and economic transition since 1990
     has caused a very rapid decline in fertility to levels that are even lower than in the new
     Member States. In addition, these countries are confronted with net migration losses, which
     means that they face the prospect of significant shrinking and ageing of their populations.

     Table 2.10 Main demographic indicators in neighbouring countries of the EU
                                                                    Life                       Percentage
                      Total Population                                          Percentage
                                                  TFR           Expectancy at                  aged 60 and
                           (1.000)                                               aged 0-14
                                                                    Birth                         above
     Countries        2000       2030     1995-     2025-       1995-   2025-   2000   2030   2000     2030
                                          2000      2030        2000    2030
                                            The Eastern Neighbours
     Russian        145.612    119.713     1.25         1.49    66.1    70.9    18.0   12.8    18.5    28.0
     Turkey          68.281     91.920     2.70         1.85    69.0    75.9    31.7   20.1     8.0    15.7
     Ukraine         49.688     38.925     1.25         1.50    68.1    75.1    17.8   12.5    20.6    28.0
                                           The Southern Neighbours
     Algeria         30 245    44 120      3.15         1.85    67.9    75.2    35.1   19.8    6.0     13.2
     Egypt           67 789    109 111     6.70         2.16    67.0    74.9    36.3   25.0    6.8     11.4
     Morocco         29 108    42 505      6.60         2.07    66.6    74.8    33.0   22.7    6.5     13.4
     Syrian Arab     16 560    28 750      3.82         2.11    70.5    76.7    39.9   24.9    4.5      9.7
     Tunisia         9 519      12 351     5.50         1.85    71.7    77.4    30.3   19.4    8.4     17.0

     33       Wilson, Ch., ‘La transition démographique en Europe et en Méditerranée.’ In Paul Sant Cassia et
              Thierry Fabre (eds), Les Défis et les Peurs: entre Europe et Méditerranée, Actes Sud/MMSH,
              November 2005, pp. 21-48.

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     Source: United Nations Population Projections of 2003 (medium variant)

     The demographic contrasts between Europe and its southern neighbours strongly suggest that
     strong migratory pressures will persist over the coming decades. The differences in expected
     population growth combined with huge differences in standards of living constitute a strong
     push factor for emigration towards the EU. In the Eastern European countries a comparable
     demographic push factor does not exist, but significant migration flows could result from
     dissatisfaction with economic and political conditions.

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     3.1.     Introduction

     At present, the baby boom cohorts are still of working age, but within a few years they will
     start retiring. This will lead to a decline in the population of working age and a rapid increase
     in the number of pensioners. As the baby boomers grow older, they will also require more
     health and long-term care. Ageing will thus lead to increasing demands on social protection
     systems (pensions and health/long-term care) while the potential labour force will be
     declining. The impact on public finances of these trends has been examined for the EU-25
     Member States by the European Commission and the Economic Policy Committee (EPC) in a
     comprehensive projections exercise based on the latest EUROSTAT population projections34.

     3.2.     Employment trends

     Although the population of working age (aged 15-64) is already expected to decline from
     2011 onwards, total employment in the EU-25 is expected to grow up to 2017 thanks to rising
     labour force participation. According to the projection, which is based on current policies, the
     overall employment rate of the EU-25 would rise from 63% in 2004 to 67% by 2010 and to
     70% by 2020: the EU would thus reach the overall Lisbon employment target, but ten years
     behind schedule, see figure 3.1. The projected increase in the employment rate will occur for
     two main reasons:

     1.       Female employment rates are projected to rise from just over 55% in 2004 to almost
              65% by 2025, remaining stable thereafter. The increase will come for the most part
              from cohort effects: older women with low participation rates will be replaced by
              younger women with a higher educational attainment and consequently a stronger
              attachment to the labour market; furthermore, policies to increase the availability of
              child care and other family-friendly measures will also have a positive effect;

     2.       The employment rates of older workers are projected to increase massively from
              40% in 2004 for the EU-25 to 47% by 2010 and 59% in 2025. This increase in the
              employment rate of older workers, observed since 2000, marks a significant reversal
              of the decades-long trend towards earlier withdrawal from the labour force. Older
              workers have accounted for three-quarters of all employment growth in the EU in
              recent years, and about half of the projected increase is due to the positive effects of
              recent pension reforms that have curtailed access to early retirement schemes and
              improved financial incentives for older workers to remain in the labour market.

     34     See ‘The impact of ageing on public expenditure: projections for the EU-25 Member States on
            pensions, healthcare, long-term care, education and unemployment transfers (2004-2050)’, European
            Economy, Special Report, No 1, 2006.
            For the assumptions underlying the projection, see ‘The 2005 EPC projections of age-related
            expenditure (2004-2050) for the EU-25 Member States: underlying assumptions and projection
            methodologies’, European Economy Special Report, No 4, 2005:

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     Figure 3.1 Projected employment rates and Lisbon targets

                                      Total                Female            Older workers
                              75      Lisbon target
                                    2010 (p)
                                    2020 (p)
                                    2050 (p)

                                                        2010 (p)
                                                        2020 (p)
                                                        2050 (p)

                                                                          2010 (p)
                                                                          2020 (p)
                                                                          2050 (p)


     Source: European Commission.

     In figure 3.2 three phases can be distinguished:

     1.        Between 2004 and 2011, there is scope for significant employment and economic
               growth as both the population of working age and employment rates are expected to

     2.        Between 2012 and 2017, rising employment rates can offset the decline in the size of
               the working-age population brought about by the baby boom generation entering
               retirement and being replaced by much smaller younger cohorts (due to the decline in
               fertility). The overall number of persons employed in the EU will continue to
               increase, albeit at a slower pace, and this period could be characterised by tightening
               labour market conditions.

     3.        After 2018, the ageing effect will dominate. By then, the cohort trend towards higher
               female employment rates will broadly have come to an end putting an even higher
               pressure on active measures to increase employment among women In the absence of
               further reforms to increase the labour force participation of older workers (and raise
               the effective retirement age), no significant further increases in the employment of
               older workers can be expected either. Consequently, the declining size of the
               working age population must be expected to translate into declining total
               employment and reduced growth prospects. Having increased by some 20 million
               between 2004 and 2017, employment during this last period is projected to contract
               gradually by almost 30 million until 2050.

     The demographic dividend of the baby boom (i.e. the fact that these large cohorts are of
     working age) combined with the current positive employment rate trends constitute a
     ‘window of opportunity’ lasting until about 2017, in which structural reforms to prepare for
     the longer-term impact of ageing can be pursued under relatively favourable growth

     At the same time, differences in employment rates between urban and rural areas will remain
     vital and significant. This especially concerns the participation of women and young people in
     the labour markets. The continued modernisation and restructuring of Europe’s agricultural

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     sector will place a heavy burden on many rural areas and will create challenges to their
     development, such as the risk of exclusion associated with lack of skills and low incomes and
     the management of the restructuring process.

     Figure 3.2 Projected working age population and total employment, EU-25

     Source: European Commission.

     3.2.1.    Ageing of the labour force and labour market bottlenecks

     A recent study35 for the Commission looked at possible imbalances in the labour market
     during the next decade given the expected slow growth or even decline in the working age
     population and the ageing of the workforce. The focus was on the demand for labour by
     education/skill level and by sector and on the supply of labour to meet this demand. Future
     labour demand and supply in 2014 were projected assuming that the trends observed between
     1994 and 2004 will continue.

     The study finds that labour demand will increase relative to supply for the more highly
     educated people, especially in the EU-10. At the same time there will also be considerable
     replacement demand for less skilled people, especially in EU-15 countries. See also figures
     3.3 and 3.4 below. The study underlines that policy needs to focus on expanding the number
     of persons with tertiary education not just in the new Member States but also in states where
     demand is projected to run ahead of supply (for example Denmark, Germany, Spain, Italy, the
     Netherlands, Finland and Sweden). The study also highlights that policy must focus on
     ensuring that employment rates are increased among women and those over 50. Moreover,
     higher employment rates among women and older workers need to be supported by ensuring
     lifelong access to suitable training and by providing support in the form of childcare and
     elderly care to make it possible for people to work.

     Given that low-skilled jobs are not going to disappear there could be future bottlenecks in the
     commercial services and in the health and long-term care sectors. This could perhaps be
     avoided by improving the attractiveness of less qualified jobs, not only in terms of pay but
     also in terms of general working conditions. In the UK for instance, the employment rate of

     35       The implication of demographic trends for employment and jobs, ‘Walter’ demographic impact study
              by Alphametrics Ltd for the European Commission, November 2005, see

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     low-skilled women is (surprisingly) lower than the EU average even though the average
     employment rate for women in the UK is above the EU average. This is probably caused by a
     lack of affordable child care for women in this category. This evidence of the need to improve
     the attractiveness of low-skilled jobs confirms the present direction of the European
     Employment Strategy, which is as much concerned with job quality as with getting more
     people into work. The expected demand for less-skilled workers may also imply a need to
     reconsider immigration policy.

     Figures 3.3 Projected required increase in employment rates among those with tertiary
     education in the EU-15 and NM-7 in 2014

     Figure 3.4 Projected required increase in employment rates among those with low
     education in the EU-15 and NM-7 in 2014

     Source: Alphametrics 2005, see footnote 35, country-level results are presented in an annex to this chapter.

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     BOX 3.1 Public preferences for how to best tackle potential labour force shortages

     The 2006 Eurobarometer on fertility and ageing36 contained a question concerning possible
     solutions to the future problem of shortages in the workforce due to population ageing. The
     most popular solutions in the EU-25 are a switch from part-time to full-time working (around
     15% of the answers) and raising the labour force participation of women (14% and 20% of
     responses among men and women, respectively).

     The idea that a higher number of children per family will ease the problem of shortages in the
     workforce also receives relatively strong support (15%). An increase in the number of
     working hours per week receives the fewest mentions (5%). In addition, increasing the legal
     retirement age or the number of immigrants from non-EU countries is not very popular either
     (slightly more than 5% of respondents chose these options).

     Which of the following suggestions aimed at solving potential shortages in the workforce do
     you agree with most?

     (% of respondents in the EU agreeing with the suggestions, maximum of two choices)

                          Discouraging early retirement

                        Raising the legal retirement age

             Encouraging people to have more children

              Encouraging immigration of workers from
                           outside the EU
      Encouraging part-time workers to change to full-
                         time work
          Increasing the number of legal weekly working
       Encouraging non-working women to participate
                    in the labour market


               Men                                 Other


                                                           0        5    10       15       20        25

     Source: Eurobarometer 2006.

     36        Testa M. R. ‘Childbearing preferences and family size issues in Europe’, VID Report on the special
               Eurobarometer, No 253, wave 65.1 and 65.31, TNS Opinion & Social for the EC, 2006.

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     3.2.2.   Ageing, productivity and prospects for economic growth

     Falling employment levels as a result of a shrinking working-age population will act as a drag
     on economic growth. Using prudent assumptions for the evolution of productivity based on
     trends observed in recent decades, the Economic Policy Committee and the European
     Commission project that the EU-25 will see a decline in the annual average potential GDP
     growth rate from 2.4% in the period 2004 to 2010 to only 1.2% in the period 2031-2050. For
     the EU-10, the decline is much steeper, in part due to their less favourable demographic
     prospects. For the EU-15, labour productivity is on average projected to be 1.7% for the
     period 2010 up to 2050. A higher productivity rate is projected for the EU-10 countries: on
     average 3.1% for the period 2011-30 and 1.9% between 2031 and 2050, thus allowing them to
     converge towards the level of economic performance in the EU-15 Member States.

     Bringing together the labour force projections and the assumptions about future productivity
     growth allows for a projection of future GDP growth rates (see also figure 3.5). For the EU-
     15, annual average potential GDP growth rate is projected to decline from 2.3% in the period
     2004-2010 to 1.3% between 2031 and 2050. For Euro area countries such as Germany,
     Greece, Spain, Italy, Austria, Italy and Portugal, potential annual growth rates are expected to
     drop to only 1%. An even steeper decline is foreseen in the EU-10, from 4.3% in the period
     2004-2010 to 0.9% between 2031 and 2050, reflecting their less favourable demographic

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     Figure 3.5 Projected (annual average) GDP growth rates in the EU-15 and EU-10 and
     their determinants (employment/productivity)

                                                      5                                                                      5

                                                      4                                                                      4
                    Labour productivity growth and

                                                      3                                                                      3
                         Employment growth

                                                                                                                                  GDP growth
                                                      2                                                                      2

                                                      1                                                                      1

                                                      0                                                                      0

                                                      -1                                                                     -1
                                                           2004-10                        2011-30              2031-50
                                                            Labour productivity growth               Employment growth
                                                            GDP growth                               GDP per capita growth
                                                            S i 14                                   S i 15

                                                      5                                                                      5

                                                      4                                                                      4
                     Labour productivity growth and

                                                      3                                                                      3
                          Employment growth

                                                                                                                                  GDP growth
                                                      2                                                                      2

                                                      1                                                                      1

                                                      0                                                                      0

                                                      -1                                                                     -1
                                                           2004-10                        2011-30              2031-50
                                                             Labour productivity growth             Employment growth
                                                             GDP growth                             GDP per capita growth

     Source: European Commission.

     3.2.3.    The impact of ageing on future productivity

     Once employment has stopped growing (due to a shrinking working age population and
     employment rates levelling out), the only source of GDP growth will be productivity. Several
     commentators have suggested that an individual’s productivity may decline with age, and that
     consequently a rising share of older workers in the labour force would automatically reduce
     overall labour productivity in the economy. It is also feared that older workers may be less
     likely to embrace innovation, more resistant to the introduction of new technologies and that
     ageing societies may also be less inclined to make long-term investments, notably in
     education and R&D.

     Recent simulation analysis carried out as preparatory work for the joint European
     Commission — Economic Policy Committee projections shows that the negative effect of a

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     change in the age structure of the population on productivity is likely to be fairly limited.
     While it is accepted that an individual’s labour productivity is expected to decline after the
     age of 55, a very strong fall in the productivity of older workers compared with that of prime-
     age workers would be required to significantly depress total labour productivity. On the basis
     of the current evidence, such an outcome appears rather unlikely. Macro-simulations show
     that to get a 5% decline compared with the baseline productivity level (i.e. a 0.1 percentage
     point decline in annual average productivity growth rates) one would need to assume that the
     productivity of those aged 50-54 and 55-64 respectively is only 70% and 50% of that of
     prime-age workers, which is obviously very pessimistic.

     It is important to recognise that productivity is much more than a simple property calculated
     by summing up individual inputs: it is rather a system attribute that cannot be separated from
     its social context. Changes in the educational and age composition of the workforce are the
     central explanatory factors for productivity growth. Ultimately, it is the composition of human
     capital in combination with technology that determines the growth potential of an economy.

     This macro-finding of the European Commission, Directorate-general for Economic and
     Financial Affairs is more or less confirmed in a recent micro-productivity study that was
     carried out for the European Commission37. The study found an inverted U-shaped
     relationship between individual productivity and age and also found, for most workers but not
     for all, significant decreases in productivity after the age of 50. The reason for this is likely to
     be age-related reductions in cognitive abilities, while experience can boost productivity up to
     a point beyond which additional tenure has little effect. Older persons become less quick
     (dexterity) and may experience a decline in their memory and reasoning abilities, see table 3.1
     below. In addition, senior workers may also find it more difficult to adjust to new ways of

     Table 3.1 Average ability measured as deviation and scaled by standard deviation
     from ability levels of 25-34-year-olds
           Age           Numerical        Managerial         Clerical           Finger            Manual     Experience
                          ability           ability         perception         dexterity         dexterity
      -19                  -0.30             -0.17             0.14               0.05              0.16       -0.40
      20-24                -0.11              0.00              0.17              0.10              0.35       -0.40
      25-34                 0.00              0.00              0.00              0.00              0.00        0.00
      35-44                -0.39              0.00             -0.28             -0.40              0.05       0.27
      45-54                -0.63              0.00             -0.55             -0.92             -0.49       0.27
      55-65                -0.85              0.00             -0.80             -1.42             -0.94       0.27
     Source: Impact of population ageing on innovation and productivity growth in Europe, see footnote 37.

     Educational attainment clearly has a strong effect on productivity and could very well
     compensate for the negative effects of ageing on productivity in the longer run. The study
     found that an extra year of education could increase productivity by 20%, which is larger than
     the 8-10% that is typically found in the literature.

     On the basis of mining and manufacturing data from Sweden, the study found that in some
     local labour markets the productivity of 50-59-year-old workers was in fact continuing to
     increase. The older workers were not as productive as prime-aged workers but they were

     37       This section is based on ‘The Impact of Population Ageing on Innovation and Productivity Growth in
              Europe’, ‘Walter’ demographic impact study by VID and IFS, November 2005, see

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     clearly more productive than the youngest workers. These older workers were experienced
     and highly skilled and they were working with modern capital equipment. This is potentially
     an important result because it indicates that the proper matching of available skills through
     well-functioning labour markets may be as important as education for maintaining the
     productivity of an ageing workforce. A labour market with a young labour force is usually
     characterised by high job turnover, which is also costly and reduces value added per
     employee. A labour market with an old labour force no longer needs such high turnover
     provided the older workers have been well matched. In purely quantitative terms, industrial
     restructuring and reallocation of labour are likely to be much more important for future
     productivity than the age composition of the labour force.
     If the result found above for Swedish industrial workers has a more general validity, then past
     policies encouraging early retirement could have lowered aggregate productivity in many
     European firms. Moreover, even if older workers have a lower productivity than the prime
     workforce, raising their participation rates would still increase per capita income simply
     because more older workers would be able to earn their own living to a larger extent.
     With the help of the microeconomic results found for Sweden, the study is able to draw
     country-specific conclusions with respect to future income growth prospects. These prospects
     could still be fairly good over the next 20 years. The study estimates that between 2005 and
     2025 projected growth rates of labour productivity may rise from slightly below 1% to over
     2% as participation rates converge to those of the best performing countries. The expected rise
     in participation will automatically generate an increase in the average level of educational
     attainment of the workforce. After 2025, however, there is a risk due to declining productivity
     growth in the absence of further improvements in participation rates and education enrolment
     rates. To maintain fast productivity growth beyond 2025 requires an extra effort to make sure
     that educational achievement levels throughout the EU reach the levels of today’s best
     performing countries.

     This implies that future income trends for individual Member States will depend very much
     on their actual participation rates, educational attainment and age structure. For instance, in
     Sweden (see figure 3.6), the automatic increase in educational levels will help to increase
     GDP per capita over the coming years but this may not be enough for a continued increase.
     Labour force participation rates are already high in Sweden and the growth potential available
     through increased labour force participation will therefore be more difficult to achieve. On the
     other extreme is Austria, see figure 3.7, which has a very high educational level but whose
     labour force participation rates for older workers are among the lowest in the EU. The growth
     potential of labour market reforms aimed at increasing these participation rates is therefore
     high for Austria. For Italy, see figure 3.8, both policies (increasing educational levels and
     labour force participation) appear appropriate and would help to increase GDP per capita over
     the coming decades.

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     Figure 3.6 Sweden, GDP per capita

                                                                              Sw eden GDP per capita



                               Euro (constant 1995)


                                                                               Constant participation/enrollment
                                                             24000             Constant participation/converging enrollment
                                                                               Convergence participation/enrollment
                                                                     2000   2005          2010            2015          2020       2025

     Figure 3.7 Italy, GDP per capita

                                                                                   Italy GDP per capita


                                     Euro (constant 1995)




                                                                               Constant participation/enrollment

                                                              5000             Constant participation/converging enrollment
                                                                               Convergence participation/enrollment
                                                                     2000   2005          2010           2015           2020       2025

     Figure 3.8 Austria, GDP per capita

                                                                               Austria GDP per capita


                                      Euro (constant 1995)


                                                                                    Constant participation/enrollment
                                                                                    Constant participation/converging enrollment
                                                                                    Convergence participation/enrollment
                                                                     2000   2005          2010            2015          2020       2025

     Source: Impact of population ageing on innovation and productivity growth in Europe, see footnote 37.

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     The problem of an ageing workforce for future productivity often appears to be exaggerated.
     The negative effects of ageing per se are not particularly strong and can be more than offset
     by higher education levels, although this can only be achieved over relatively long time spans.
     Instead of focussing on whether productivity declines with age, a more relevant question is
     how to adapt education and lifelong learning policies in the context of an ageing society.
     Ageing should actually increase the economic returns to education, as the benefits of higher
     productive potential can be exploited over a longer time horizon, provided skills are updated
     throughout working life.

     The discussion of the demographic dividend has shown that changes in relative cohort size are
     likely to exert an important impact on economic growth. The simulation results in the box
     below indicate the order of magnitude of these age-related effects for the future. The general
     conclusion is that it will be hard to avoid a decline in GDP growth rates, but that this decline
     will be more severe in demographic scenarios that imply slow or even negative rates of
     workforce growth. Policies aimed at ensuring an expansion, or at least non-negative growth,
     of the working age population can thus be recommended. Preferably, such policies should
     both encourage immigration and aim to restore fertility rates to near-replacement level. The
     projections imply negative, but not catastrophic effects of population ageing on per capita
     GDP growth rates. Moreover, analysis of the growth forecasts based on different population
     scenarios shows that the forecast outcomes are not very sensitive to different demographic
     assumptions. Restricting immigration, though, would come at the price of somewhat lower
     per capita income growth.

     BOX 3.2 The effect of future demographic change on economic growth in the EU38

     The researchers estimated a separate growth model for each of the EU-25 countries in which a
     major part of past economic growth could be explained by change over time in the relative
     size of the various cohorts that make up the working age population. In a next step, this model
     was fed with the latest Eurostat population projections and used to generate future GDP per
     capita growth rates. The results were calculated for five different Eurostat variants: 1/ the base
     line scenario; 2/ the baseline scenario with zero migration to analyse the effect of migration;
     3/ the baseline scenario with a high fertility assumption to analyse the effect of higher
     fertility; 4/ the high scenario with low life expectancy to maximise the number of young, and
     5/ an old scenario which combines low fertility with high life expectancy to maximise the
     number of old. Figure 3.10 below presents the aggregate results for the EU39 for the five
     different scenarios.

     The general long-term trend in growth rates is downward, primarily because of the negative
     effect of an increasing share of the older population. More people over 65 implies a lower
     growth rate in GDP per worker and has a depressing effect on GDP per capita due to the
     declining share of the working age population.

     38     ‘The relationship between demographic change and economic growth in the EU’ by A. Prskawetz, Th.
            Fent, W. Barthel of Vienna Institute for Demography, J. Crespo-Cuaresma of Vienna University and
            Th. Lindh, B. Malmberg, M. Halvarsson of the Institute for Future Studies, ‘Walter’ demographic
            impact study 2006, forthcoming.
     39     Luxembourg and Cyprus had to be excluded due to the lack of demographic and initial income data

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     The high fertility variant leads to a growth rate after 2030 that is 0.2% larger than the original
     base line. The variant with the maximum number of young arrives at a 0.3% higher growth
     rate. The zero migration variant leads to a 0.4% lower growth rate whereas the variant with
     the maximum number of elderly generates a 0.5% lower growth rate. In general the negative
     effects of more ageing and/or less migration are larger than the positive effects of higher
     fertility and lower life expectancy.

     GDP per capita for the EU-25 according to various population scenarios

     These are ceteris paribus results assuming that increased life expectancy has no effect on the
     economic behaviour of individuals. However, recent research suggests that such an
     assumption is probably unwarranted. Instead, longer life expectancy can result in increased
     investment in education, increased savings rates and, possibly, a higher optimal rate of
     retirement. Thus, the negative effects on per capita GDP growth should perhaps be seen as the
     outcome of a scenario where such adaptations to higher life expectancy are impeded by bad
     policies. The zero migration scenario40 has a relatively strong negative effect on the per capita
     income growth rate for countries that today have positive net migration.

     40     The Eurostat baseline projection makes very different assumptions about trends in net migration for
            different countries. For instance, in 13 of the EU-15 countries, Eurostat assumes declining net
            migration, the exceptions being NL and FI.

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     3.3.     Challenges to public finances and intergenerational solidarity

     The challenge of demographic ageing not only consists in ensuring that Europe’s economy
     can continue to grow thanks to higher labour force participation and strong productivity
     growth. The issue of a declining working age population may be less difficult to tackle than
     the problem of providing adequate resources for an increasing number of older people who
     need adequate pensions and health and long-term care. The changes in demography therefore
     constitute a major challenge for public finances and social cohesion, which is illustrated by
     the fact that in 2050 there will be two working-age people per elderly citizen as opposed to
     the current ratio of four to one.

     The long-term projections carried out by the Economic Policy Committee and the European
     Commission show that the pension, health and long-term care costs linked to the ageing
     population will lead to significant increases in public spending in most Member States by
     2050. Many Member States have already carried out reforms which put them on the path to
     greater sustainability, but substantially increased expenditure on pensions is still projected for
     some countries. On the basis of current policies, total age-related public expenditure is
     projected to increase by 3.4 percentage points of GDP, while expenditure on pensions, health
     and long-term care alone is projected to increase by 4.4 percentage points for the EU-25 and
     up to 10 percentage points in some Member States41.

     41     See Economic Policy Committee/European Commission: ‘The impact of ageing populations on public
            spending on pensions, health and long-term care, education and unemployment benefits for the elderly’,
            February 2006, available under:
            The focus of these projections is forward-looking and they are not directly comparable with ESSPROS
            figures as they do not include occupational private expenditure and private healthcare.

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     3.3.1.    Pensions

     The trends for pensions are presented in Table 3.2 below.

     Table 3.2 Projected change in spending on public pensions (in % of GDP)

                                                  2004       2030         2050

                                                  Level    Change from 2004
                                        BE         10.4            4.3      5.1
                                        CZ          8.5            1.1      5.6
                                        DK          9.5            3.3      3.3
                                        DE         11.4            0.9      1.7
                                        EE          6.7           -1.9     -2.5
                                        EL             :              :        :
                                        ES          8.6            3.3      7.1
                                        FR         12.8            1.5      2.0
                                        IE          4.7            3.1      6.4
                                        IT         14.2            0.8      0.4
                                        CY          6.9            5.3     12.9
                                        LV          6.8           -1.2     -1.2
                                        LT          6.7            1.2      1.8
                                        LU         10.0            5.0      7.4
                                        HU         10.4            3.1      6.7
                                        MT          7.4            1.7     -0.4
                                        NL          7.7            2.9      3.5
                                        AT         13.4            0.6     -1.2
                                        PL         13.9           -4.7     -5.9
                                        PT         11.1            4.9      9.7
                                        SI         11.0            3.4      7.3
                                        SK          7.2            0.5      1.8
                                        FI         10.7            3.3      3.1
                                        SE         10.6            0.4      0.6
                                        UK          6.6            1.3      2.0
                                        EU-25      10.6            1.3      2.2
     Source: Economic Policy Committee and European Commission.

     Public and private spending on pensions, which in 2003 averaged 13% of GDP in the EU , has
     ensured that being old is no longer associated with being poor or dependent on one’s children
     (see the table below). This has mainly been achieved through the provision of public pensions
     (amounting to about 10% of GDP). Public spending on pensions is projected to increase in
     most countries; in some, it is projected to decrease because a part of it is being shifted into
     private pension savings. Despite this shift to private provision, and the need to ensure well
     functioning, competitive and open pension and retirement markets, the adequacy of retirement
     income will continue to be a public responsibility. However, there are significant differences
     across Member States as far as the fight against poverty in old age is concerned and poverty
     risks among older people generally remain somewhat higher than for the rest of the
     population (see also figure 3.9 below on poverty risks).

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     Figure 3.9 Risk of poverty amongst older people (ceiling at 60% of the median)








                                                                Total    65+

     Source: HBS for BG and RO, EU-SILC for others. Income reference year 2004.
     Notes: At-risk-of-poverty rates are defined as the share of persons with an equivalised disposable income below an at-risk-of-
     poverty threshold. Equivalised disposable income is defined as the household’s total disposable income divided by its
     ‘equivalent size’ to take account of its size and composition. The at-risk-of poverty threshold is set at 60% of the national
     median equivalised disposable income. It must be noted that income generated from owner-occupied housing or housing at
     below market rents — i.e. imputed rent — is not included in the definition of income. Inclusion of this element of income
     could make a significant difference in the measurement of risk-of-poverty rates.

     Pension systems aim not only to ensure that older people do not have to live in poverty, but
     also provide arrangements to allow them to maintain a living standard after retirement that is
     not too far off from what they enjoyed during their working lives. Earnings related pensions
     are essential in this respect and in future will continue to be the main source of pension
     income for retired people. Thanks to pension entitlements that generally provide 60-70% of
     an individual’s income upon retirement, older people enjoy living standards relatively close to
     that of the general population, generally ranging between 75% and 90% of that of the 0-64
     population. However, there are significant differences between men and women as a result of
     differences in past earnings due to different employment histories. In some countries, credits
     have been introduced for periods devoted to care.

     Future levels of pensions in relation to earnings (income replacement levels) will depend
     firstly on the pace of accrual of pension entitlements, which is linked to developments in the
     labour market, and on the maturation of pension schemes. On the whole, pension schemes (in
     particular statutory schemes) currently manage to ensure adequate income replacement levels
     after a full career in most Member States. In certain cases, however, current average pension
     levels turn out to be low compared to current earnings, reflecting low coverage or low income
     replacement under statutory schemes, as well as maturing pension systems and incomplete
     careers or under-declaration of earnings in the past.

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     The work carried out on future replacement rates by the Indicators’ Sub-Group of the Social
     Protection Committee42 suggests that reforms of statutory schemes may reduce replacement
     rates at given retirement ages. Pensions are generally indexed to prices, which means that they
     generally lag behind the evolution of wages. This can translate into significant reductions in
     theoretical replacement rates upon retirement. On the other hand, rising female labour force
     participation and longer working lives in all Member States will result in higher average
     pensions. In southern and eastern Member States, economic modernisation and corresponding
     employment changes will also lead to better pension outcomes in the future. These structural
     developments could offset the trend towards less generous benefit rules to a significant extent.
     However, other factors could also work in the opposite direction, for example further
     postponement of entrance to the labour market or an increase of periods of unemployment.

     Several countries have extended — or are in the process of extending — the period of
     earnings history used for calculating the pension entitlement. Thus, instead of using the years
     of highest earnings towards the end of the career, earnings over a much longer period or even
     the entire career are taken into account (i.e. going from a final wage system to an average
     wage system). This will usually lead to lower pension levels, particularly if past earnings are
     not fully adjusted for (nominal) wage growth. Pension levels can also be lowered by
     adjustments to the formula used to calculate benefits. One significant development has been
     the introduction of a demographic adjustment factor as in the Swedish scheme where rising
     life expectancy will lower the replacement rate unless people postpone their retirement.
     Mechanisms to take into account the ratio between the employed and retired are also being
     developed. Such reforms provide strong incentives for people to postpone retirement in line
     with rising life expectancy until they can get an adequate pension.

     Europe’s future ability to provide adequate pensions to the ageing baby boom cohorts will
     crucially depend on whether the effective retirement age can be raised again. Pension systems
     must also make the relationship between contributions and benefits more transparent and be
     adapted to increasing life expectancy. While in the 1960s it was normal to retire well after 60,
     workers left the labour markets increasingly earlier during the 1970s and 1980s and, although
     this trend now seems to have reversed, the average ages upon leaving the labour market are
     still below the levels of the late 1960s. Moreover, the employment phase of the life-cycle has
     been compressed by longer periods spent in education.

     While the number of years in employment has declined since the 1960s, life expectancy at 60
     increased within the EU-25 by around 4 years between 1960 and 2000 (from 15.8 years to
     19.3 years for men and from 19 years to 23.6 years for women). The most recent Eurostat
     projections are based on a further increase of four years in life expectancy at 65 between 2004
     to 2050 (an additional 4.4 years for men and 3.9 years for women)43. In short, contribution
     years have decreased over the past decades while the years in receipt of benefits have
     increased and could continue to increase. Pension reforms that restore the balance between
     contribution years and years of benefit receipt will make a major contribution towards
     preventing poverty in old age at a time when the number of pensioners will be much larger
     than today.

     42     See
     43     Joint Report on Social Protection and Social Inclusion, 2006. See

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     3.3.2.     Health and long-term care

     The probability of needing health and long-term care increases with age, with most care needs
     concentrated during the final years of life. The main consumers of health and long-term care
     are therefore people over 80 whose share in the total population according to the Eurostat
     population projection will rise from 4.1% in 2005 to 6.3% in 2025 and to 11.4% in 2050,
     mainly due to further increases in life expectancy, falls in fertility rates and the effect of the
     baby boom generation reaching old age. The number of the 80+ in the EU-25 is projected to
     grow by 58% between 2005 and 2025 (see also figure 3.10).

     Figure 3.10 Increase of population 80+ vs. increase of the proportion of the population
     80+ in the total population between 2005 and 2025

     Source: European Commission.
     Note: Increase of the proportion of the population 80+ on right axis.

     Although not age but rather the health status of a person is the main factor behind healthcare
     spending , the Economic Policy Committee projections illustrate that an ageing population
     would increase the pressure for more public spending in healthcare. It could push up
     healthcare spending by between 1% and 2% of GDP in most Member States, i.e. an increase
     of approximately 25% over current spending (see also table 3.3 below).

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     Table 3.3 Projected change in public spending on healthcare (in % of GDP)

                                                  2004       2030        2050

                                                  Level    Change from 2004
                                        BE           6.2           0.9     1.4
                                        CZ           6.4           1.4     2.0
                                        DK           6.9           0.8     1.0
                                        DE           6.0           0.9     1.2
                                        EE           5.4           0.8     1.1
                                        EL           5.1           0.8     1.7
                                        ES           6.1           1.2     2.2
                                        FR           7.7           1.2     1.8
                                        IE           5.3           1.2     2.0
                                        IT           5.8           0.9     1.3
                                        CY           2.9           0.7     1.1
                                        LV           5.1           0.8     1.1
                                        LT           3.7           0.7     0.9
                                        LU           5.1           0.8     1.2
                                        HU           5.5           0.8     1.0
                                        MT           4.2           1.3     1.8
                                        NL           6.1           1.0     1.3
                                        AT           5.3           1.0     1.6
                                        PL           4.1           1.0     1.4
                                        PT           6.7          -0.1     0.5
                                        SI           6.4           1.2     1.6
                                        SK           4.4           1.3     1.9
                                        FI           5.6           1.1     1.4
                                        SE           6.7           0.7     1.0
                                        UK           6.7           0.7     1.0
                                        EU-25        6.4           1.0     1.6
     Source: Economic Policy Committee and European Commission.

     Improvements in the health status of the elderly are projected to have a large effect on health
     spending, moderating the projected increase in spending on healthcare due to ageing. If
     healthy life expectancy would evolve broadly in line with the change in life expectancy, then
     the projected increase in spending on healthcare due to ageing could be halved. In
     comparison, less progress has been made in incorporating other important drivers of spending,
     mainly on the supply side, into the projection model. Stylised scenarios (see figure 3.11
     below) indicate that the projected increase in public spending on healthcare is very sensitive
     to the assumptions regarding the evolution of unit costs and the income elasticity of demand.
     Healthcare spending around the world is generally already rising at a faster rate than
     economic growth44. Spending on health as a share of GDP could increase rapidly if unit costs
     (wages, pharmaceutical prices, spending on technologies) grow faster than their equivalents in
     the economy as a whole, on account of public policies aiming to improve access to health or
     improve quality (by reducing waiting lists, increasing choice, etc.), or if rising per capita
     income levels and rising death-related costs lead to increased demand for healthcare services.

     44      Snapshots: Health Care Spending in the United States and OECD Countries, January 2007

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     Figure 3.11 Projected change in healthcare expenditure between 2004 and 2050 (in %
     of GDP, EU-25)45

     Source: Economic Policy Committee and European Commission.

     The pure ageing scenario ageing scenario assumes that age-specific health spending per capita
     remains constant over time. The constant health scenario captures the potential impact of
     improvements in the health of the elderly. The death-related costs scenario combines an
     increase in healthy life with the fact that most healthcare costs are incurred in the final years
     of a person’s life. The income elasticity scenario assumes that the income elasticity of demand
     for healthcare exceeds unity. Finally, the Ageing Working Group (AWG) reference scenario
     shows the impact of a balanced combination of the factors affecting healthcare spending..

     3.3.3.    Long-term care

     An ageing population will place a strong upward pressure on public spending for long-term
     care as frailty and disability rise sharply at older ages, especially amongst the very old (aged
     80+). According to the ‘AWG reference scenario’ based on current policy settings, public
     spending on long-term care is projected to increase by between 0.1 percentage points and 1.8
     percentage points of GDP between 2004 and 2050 (see also table 3.4 below). However, this
     range reflects very different approaches to the provision and/or financing of formal care. The
     projections are based on the current institutional setting and assume no change in public
     provision policy.

     45       European Economy Special Report, No 1, 2006, pp. 108-112.

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     Table 3.4 Projected public spending on long-term care (as % of GDP)

                                      2004   2010   2020   2030      2040   2050   2004-2050
                             BE        0.9    0.9    1.1       1.3   1.6    1.8       0.9
                             DK        1.1    1.1    1.2       1.8   2.0    2.2       1.1
                             DE        1.0    1.0    1.2       1.4   1.6    2.0       1.0
                             EL         :      :      :         :     :      :         :
                             ES        0.5    0.5    0.5       0.5   0.6    0.8       0.2
                             IE        0.6    0.6    0.6       0.7   0.9    1.2       0.6
                             IT        1.5    1.5    1.6       1.7   1.9    2.2       0.7
                             LU        0.9    1.0    1.0       1.1   1.3    1.5       0.6
                             NL        0.5    0.5    0.5       0.8   0.9    1.1       0.6
                             AT        0.6    0.7    0.8       1.0   1.2    1.5       0.9
                             PT         :      :      :         :     :      :         :
                             FI        1.7    1.9    2.1       3.0   3.4    3.5       1.8
                             SE        3.8    3.7    3.7       4.9   5.2    5.5       1.7
                             UK        1.0    1.0    1.1       1.3   1.5    1.8       0.8
                             CY         :      :      :         :     :      :         :
                             CZ        0.3    0.3    0.4       0.5   0.6    0.7       0.4
                             EE         :      :      :         :     :      :         :
                             HU         :      :      :         :     :      :         :
                             LT        0.5    0.6    0.6       0.6   0.7    0.9       0.4
                             LV        0.4    0.4    0.5       0.5   0.6    0.7       0.3
                             MT        0.9    0.9    0.9       1.0   1.1    1.1       0.2
                             PL        0.1    0.1    0.1       0.1   0.2    0.2       0.1
                             SK        0.7    0.8    0.7       0.9   1.1    1.3       0.6
                             SI        0.9    1.1    1.3       1.5   1.9    2.2       1.2
                             EU-25     0.9    0.9    0.9       1.1   1.3    1.5       0.6
                             EU-15     0.9    0.9    LO        1.1   1.3    1.5       0.7
                             EU-1O     0.2    0.3    0.3       0.3   0.4    0.5       0.2
     Source: European Commission
     Note: EU-25, EU-15 and EU-10 — average weighted by GDP.

     The projections show that an ageing population may lead to a growing gap between the
     number of elderly persons with a disability who are in need of care (which will more than
     double by 2050) and the actual supply of formal care services. Countries with very low
     projected increases in public spending currently have very low levels of formal care. If these
     countries would respond to the growing need for professional care by increasing the supply of
     formal care services, their spending rates may increase much more dramatically. The results for
     the different long-term care scenarios are presented in figure 3.12 below.

     The Economic Policy Committee/European Commission study has also prepared an estimate of
     the number of dependent elderly people for those countries for which both data from SHARE46
     on disability rates and data from national sources on the numbers of people living in institutions
     are available47 (see table 3.5 below). In most countries, around 20% of the population aged 65+
     has some form of disability. For men, this ranges from 12% in the Netherlands to 27% in the UK,
     and for women from 19% in Denmark, the Netherlands and Austria to 33% in the UK.

     46      SHARE: Survey of Health Ageing and Retirement in Europe, Editor A. Boersch-Supan, 2005.
     47      European Economy Special Report, No 1, 2006, p. 141.

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     Table 3.5 Estimated elderly dependent population in 2004 for 8 EU Member States (in
                                                                                                                   Total            As % of
                                                                                                                dependent             total
                     65-69                 70-74                    75-79                 80+
                                                                                                                population         population
                                                                                                                 aged 65+           aged 65+
               Men       Women    Men        Women             Men     Women       Men     Women       Men              Women     Men    Women

        DK      11        16           5          10           11           11     27           49         54            86       16       19
        DE     191        183      117            340          174      414        390      980        873              1.917     15       22
        ES      67        83       109            150          115      189        189      546        480               968      16       23
        IT     113        124      128            310          201      337        299      702        741              1.473     16       23
        NL      23        24       14             34           23           44     51       150        111               251      12       19
        AT      9         19       11             22           20           27     12           77         52            145      11       19
        SE      9         13       16             15           17           36     62       154        104               218      16       25
        UK     230        285      266            329          231      356        361      841        1.088            1.811     27       33

     Source: SHARE, 1+ ADLs, AWG population scenario reported in the Economic Policy Committee and European
     Commission (2005a).
     Note: Estimates of the number of people in institutions by age have been made for Denmark, Spain, the Netherlands and

     According to SHARE, ‘Older people are often at the centre of a complex exchange network
     within a family where they both give and receive support. Many persons between 50 and 65
     are involved with personal care for their parents and later on for their spouses. There appears
     to be a strong North/South divide in Europe; a higher proportion of older people are involved
     in family support in northern and continental countries, where as in southern countries help
     and support tends to be confined to a few individuals within the family who are more
     intensely involved as either the givers or receivers of care. As a consequence older people
     living alone are more likely to be given support in northern countries.’

     Table 3.6 below, taken from SHARE, provides detailed information on the living situation
     and the type of care received by the 80+ in the SHARE countries.

     Table 3.6 Living situation and type of care of persons 80+ who are not living in an
                                            SE          DK       NL         DE     FR       AT       CH          ES        IT    EL     TOTAL

     Mean age in years                     84.8         84.3    83.7        84.2   83.9    84.0      84.5        84.7     84.0   84.7    84.3

     Living alone in %                     66.3         64.4    62.7        64.9   53.4    66.7      53.3        39.2     50.7   65.7    56.2

     Living as couple in %                 31.1         29.8    34.3        26.7   37.1    20.0      39.5        24.0     27.8   26.6    27.4

     Living with family in %                2.6         5.8      3.0        8.4    9.4     13.3      7.2         36.8     21.6   7.7     16.4

     Personal care from HH in %            16.9         21.5    10.5        31.2   25.5    43.6      11.9        37.8     38.2   34.0    33.3
     Personal care from HH or PCG
                                            9.9         24.0    15.1        22.1   32.6    22.8      5.2         31.5     23.2   10.4    22.5
     in %
     Practical help or personal care
                                           36.7         60.0    48.7        28.0   54.5    32.7      6.3         41.7     29.2   11.1    32.3
     (HH or PCG) in %
     Getting help from children in %       39.4         28.9    30.9        43.6   40.0    28.6      19.5        20.6     14.9   50.5    30.4

     Source: SHARE 2005.
     Note: HH=household, PCG= professional care giver.

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     The share of very old persons living alone is between 50% and 70%; only in Spain is this
     share lower at 39%. There are larger differences when it comes to living with family. It
     appears that this arrangement is much more common in southern than in northern Europe, e.g.
     37% in Spain and 22% in Italy compared to only 3% in Sweden and the Netherlands. In terms
     of the type of care received within the household, from a professional care giver or from one’s
     own children, the situation is rather diverse. For instance, there does not appear to be a trade-
     off between professional care and getting help from children. SHARE concludes that ‘A
     mixture of public, voluntary and personal care does not erode family support. Instead family
     members are freed from the more arduous tasks of intensive personal care (undertaken by
     professional services) and are able to devote more time to other family relationships.’

     The Economic Policy Committee/European Commission has also constructed a number of
     different long-term care scenarios to explore the sensitivity of future public expenditure under
     various assumptions48. The first scenario is once more the pure ageing scenario assuming
     constant disability rates. The ‘constant’ disability scenario assumes an improvement in
     general disability status. The cost/GDP per capita scenario assumes that unit costs evolve in
     line with GDP per capita. The increased formal care scenario assumes a change in policy,
     where formal care services are provided to a growing share of the elderly population (the
     prevalence of receiving formal care increases in all countries by 1% per year during the period
     2004-2020. Finally the Ageing Working Group reference scenario combines these scenarios
     in a prudent way (see Figure 3.12). The analysis shows that the main risk with an ageing
     population would be an increase in the demand for formal long-term care. There may be less
     informal care available within households on account of trends in family size and the
     projected increase in the participation of women in the labour market. For countries currently
     with less developed formal care systems, the headline projected increase in public spending
     on long-term care may not fully capture the pressure on public finances, as policy changes in
     favour of more formal care provision may be needed in future .

     48     European Economy Special Report, No 1, 2006, p. 135.

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     Figure 3.12 Change in long-term care expenditure (in % of GDP, EU-25)









                            Pure ageing GDP Constant disability   Cost - GDP per   Increased formal   AWG reference
                               per capita                             worker             care           scenario

     Source: Economic Policy Committee and European Commission.

     Future healthcare needs will depend not only on ageing-related developments (including
     healthy ageing trends). Future expenditure will also depend on new technological
     developments (which may increase expenditure by making new forms of treatment and care
     available or reduce it by replacing expensive with cheaper treatments). The provision of
     (formal) long-term care is a highly labour intensive activity with relatively little room for
     technology-driven productivity increases. Long-term care needs will be very much influenced
     by the expectations of patients, who normally prefer to be cared for at home care, as well as
     by the capacity and willingness of families to provide informal care (which is likely to depend
     on the geographic proximity of relatives or the employment status of potential carers).

     As reflected in the Joint Report on Social Protection and Social Inclusion 200749, the National
     Reports from the Member States highlight other significant areas essential for the
     sustainability of long-term care systems. These include developing more formalised care for
     the elderly and disabled and attaching a higher priority to home care services and the
     introduction of new technology (e.g. independent living systems) which can enable people to
     live in their own homes for as long as possible. And, in addition, Member States also stress
     the importance of rehabilitation, which in turn helps dependents return to an active life.

     49      COM(2007) 13 final.

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     4.1.     Introduction

     In its Communication on ‘The demographic future of Europe — from challenge to
     opportunity’, the Commission presented a constructive response to the demographic challenge
     and highlighted five policy areas in which the Member States can take measures to tackle this
     challenge. The areas are:

     • ‘demographic renewal’, i.e. lifting the obstacles to a return to higher fertility rates;

     • raising employment levels, which will result in a better balance between active and
       inactive people;

     • boosting productivity growth and hence the economy’s ability to meet the needs of an
       ageing population;

     • receiving and integrating immigrants so as to avoid future labour shortages;

     • and ensuring the sustainability of public finances and thus securing the ability to maintain
       adequate social protection and public services in the future.

     This chapter examines how much scope there is for improvement in each of these five areas
     and provides some indications as to the obstacles that need to be overcome to unlock the
     potential for tackling the demographic challenge.

     Clearly, combinations of measures in several of these areas are needed, but each Member
     State has different potentials in each of these areas and will therefore require its own specific
     policy mix. The data presented in this chapter should allow each Member State to identify the
     areas with the greatest scope for improvement and to define policy priorities accordingly.

     4.2.     Demographic renewal: how much scope is there for increased fertility?

     The Commission’s communication on the demographic future of Europe stressed that
     Member States can respond to low birth rates and that such reactions are both necessary and
     realistic. The necessity stems from the fact that people generally would like to have more
     children than they actually have. That a policy response to low birth rates is realistic is
     demonstrated by international comparisons underlining the effectiveness of policies to support
     those who wish to have children.

     4.2.1.   Potential for more births

     In all EU Member States the fertility rate has declined to a level below the replacement level
     of 2.1 and the EU average is just below 1.5 (see figure 4.1 below). This means roughly that
     every generation is replaced by a generation that is 25% smaller. At the same time, there are
     large differences in fertility levels between Member States.

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     Figure 4.1 Total Fertility Rates in 2005

























     Source: Eurostat.

     Two groups can be distinguished. On the one hand, there are countries with fertility rates
     above 1.6 (e.g. FR, UK, NL, BE, DK and SE), which, given rising life expectancy and
     continuing migration, will prevent population decline. In most other Member States, however,
     fertility rates do not exceed 1.5, implying that population decline seems inevitable.

     A return to higher fertility rates would not prevent the accelerated ageing resulting from the
     baby boom cohorts growing old. Moreover, with rising life expectancy, a constant old-age
     dependency ratio could only be achieved by fertility rates well above the replacement level —
     and this would mean continuous population growth. Higher fertility will eventually result in a
     larger labour force, but this takes about 20 years, i.e. the time it takes for these cohorts to go
     through the education system and enter the labour market.

     Figure 4.2 illustrates the long-term effects of higher fertility on the working age population. It
     compares the size of the potential labour force in 2030, 2040 and 2050 under the baseline
     scenario and a high fertility scenario.

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     Figure 4.2 Difference in the size of the 20-64 working age population for the High
     Fertility Scenario and the Baseline Scenario (in % of baseline labour force)























                                                                                         2030      2040      2050

     Source: Eurostat New Cronos and own calculations50.

     The baseline scenario assumes continuing low fertility rates in the EU-25, albeit at a
     somewhat higher level than today in the low fertility countries. In 2050 the highest total
     fertility rates are expected in Sweden and France (1.85), compared to TFRs of 1.4 or 1.45 in
     countries such as Spain, Italy, Germany and Austria, which are expected to have the lowest
     fertility rates. For the EU as a whole, the TFR in 2030 is assumed to be 1.62.

     Under the high fertility scenario, it is assumed that the fertility rate in 2035 will have
     stabilised at 1.93 per woman, relative to the baseline value. Figure 4.2 shows that the higher
     fertility scenario will have hardly any impact on the population of working age in 2030; the
     effect will only start to be noticeable from 2040 onwards.

     In spite of the fact that increased fertility rates will only produce positive economic impacts
     after a very long time lag, many countries consider low fertility rates as a public policy issue.
     According to the UN population perception surveys, 18 out of 29 European countries
     considered their fertility level as ‘satisfactory’ in 1976. By 2005 a majority of 28 out of 43
     perceived the fertility level as ‘too low’51. Only two of the EU-10 and six of the EU-15
     Member States believed that no intervention was called for to raise fertility levels52. The
     replies of the Member States to the Commission’s Green Paper on demography confirmed
     that majority of Member States now tend to see the current low fertility rate as a matter of
     public concern.

     In the long run, higher fertility rates would prevent population decline and, while not
     reversing demographic ageing, would contribute to a more balanced mix of younger and older

     50        EUROPOP 2004 population projection, the difference between the baseline scenario and a high fertility
     51        Various UN Population Perception Surveys held between 1979 and 2005. In these surveys governments
               are asked whether countries consider their level of fertility ‘too low, satisfactory or too high’.
     52        On fertility policy the question asked is: ‘Should one raise, maintain or lower policy intervention or
               should there be no policy intervention?’

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     people in society. However, it is a highly personal choice whether to have children or not and
     the only way governments in a free society can influence fertility rates is by removing
     obstacles that prevent those who would like to have children from actually having them.
     Apparently, there are several constraints preventing Europeans from realising their desire to
     have children, see also the previous discussion in section 2.2.4. The problems include a lack
     of jobs and housing for young people wanting to start a family, the difficulty of reconciling
     paid work with family life and perhaps also a general lack of confidence in the future53. All
     these factors may have a negative impact on young people thinking about starting a family
     and on the likelihood of existing families having an extra child.

     Greater gender equality and a better work/life balance seem to be conducive to increasing
     both female labour force participation and fertility. In fact there has been a reversal in the sign
     of the correlation between fertility and female labour force participation among OECD
     countries since the middle of the 1980s. This cross-country correlation switched from -0.54 in
     1970 to 0.68 in 199654. Today, countries where many women are in paid employment, often
     supported by effective instruments to reconcile work with private and family responsibilities
     for both men and women, tend to have higher fertility rates than countries where fewer
     women work. Countries where it has remained difficult to reconcile employment and having a
     family tend to have experienced a large decline in births combined with only a modest
     increase in female labour force participation. In Italy, for example, female force participation
     went from about 34% in 1975 to just about 51% in 2004, a fairly low figure when compared
     to the 75% in Sweden. The TFR in Italy and Sweden stood at 2.5 and 2.3 during the first half
     of the 1960s, but in 2004 was 1.3 and 1.8, respectively. The availability of childcare helps to
     combine work and family and appears to have a particular effect on the probability of working
     for highly educated women.

     4.2.2.    Unlocking the potential for more births

     Public policy matters when trying to understand differences in fertility. It can create better
     conditions for founding a family, raising children, reconciling work and family life as well as
     sharing family and domestic responsibilities between women and men. Clearly, some Member
     States have already found relatively successful policy mixes.

     53       Survey realized near 34.000 Europeans aged 18-75 old living in 14 countries in the period from 1999 to
              2003. Population Policy Acceptance Study Dialog, produced by the Federal Institute for Population
              Research for the Robert Bosch Stiftung.
     54       De Laat, J. and A. Sevilla Sanz, ‘Working women, men's home time and lowest-low fertility’, Essex
              University ISER, Working Paper, No 23, 2006.

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     BOX 4.1 Different family policy mixes in Europe

     At the 2005 Green Paper conference ‘Confronting demographic change: a new solidarity
     between the generations’, one of the experts, Linda Hantrais55, summed up the current
     situation across the EU as follows:

     ‘Some countries would appear to be more successful (the Nordic states) in achieving
     relatively high employment rates for women in combination with a widespread level of social
     acceptance of working motherhood, measured in terms of attitudes and practices and the
     legitimacy of public policy intervention. They do so through a high tax economy and heavy
     reliance on the public sector. Southern European countries are at the other end of the
     spectrum, low female employment rates (except Portugal) combine with heavy reliance on
     intergenerational support networks, which are, however, increasingly being called into
     question. In between are two contrasting models. The Anglo-Saxon countries depend on
     highly flexible labour markets, small public sectors, a low-wage household service sector and
     a welfare-to-work ethos. The corporatist countries (Austria, Germany and the Netherlands)
     have remained closer to the traditional male breadwinner model, with less public support for
     families and greater reliance on collective labour agreements and on women prioritising their
     role as mothers at home rather than working mothers. The Central and East European
     countries present a rather different configuration: they combine traditionally high female
     activity rates, although both male and female rates have been falling, with a strong
     commitment to mothers as workers, not however for reasons of gender equality. Here,
     cutbacks in the provision of public services and the shrinking public sector have hit women
     hardest and have forced families to become more self-reliant.’

     All Member States support families in one form or another, the main types of support being:

     1.      Financial support (including tax breaks) to reduce the financial inequality between
             people with and without children; Financial support

     Children are costly in terms of both direct costs and foregone earnings. These costs create
     considerable income differences between otherwise comparable couples with and without
     children. Social protection benefits compensate for the direct and indirect costs of having
     children. According to Eurostat data on social protection expenditure (ESSPROS — which do
     not include tax benefits or spending on education), about three quarters of social protection
     benefits targeted at families take the form of benefits in cash. In 2004, they amounted to some
     1.5% of GDP for the EU-25, ranging from 0.4% in Spain to more than 3% in Luxembourg
     (see table 4.1 below). Benefits in kind amounted to 0.6% of GDP with an even larger
     variation across countries. The differences become larger when one corrects for the fact that
     the share of young people differs between countries.

     55     See

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     Table 4.1 Social protection benefits targeted at family support in the EU


                      Share of                                                         Total family       Support   Support
                                            Support intensity
                     population                                                         support           in cash   in kind
                                          corrected for the share           TFR
                    between 0-19
                                               of the young*                                          In % of GDP
                        in %
     EU-25               22.5                       9.32                    1.51                2.1   e   1.5   e    0.6    e
     EU-15               22.2                       9.46                      :                 2.1   e   1.5   e    0.6    e
     EA-12               21.6                       9.71                    1.51                2.1   p   1.5   p    0.5    p
      BE                 23.2                       8.63                    1.68                  2       1.6        0.4
      CZ                 21.7                       7.36                    1.23                1.6   p   1.4   p    0.2    p
      DK                 24.3                       16.04                   1.78                3.9       1.6        2.3
      DE                 20.5                       14.65                   1.37                  3   p   2.2   p    0.7    p
      EE                 23.9                       7.11                    1.47                1.7       1.6        0.1
      IE                 28.4                       8.81                    1.99                2.5       2.3        0.3
      EL                 20.2                       8.41                    1.31                1.7       1.2        0.5
      ES                 20.1                       3.48                    1.33                0.7   p   0.4   p    0.3    p
      FR                 25.1                       9.98                    1.92                2.5   p     2   p    0.5    p
      IT                 19.2                       5.73                    1.33                1.1   p   0.7   p    0.5    p
      CY                 27.8                       7.21                    1.49                  2       1.9        0.1
      LV                 23.4                       5.55                    1.24                1.3   p     1   p    0.2    p
      LT                 25.7                       4.28                    1.26                1.1   p   0.7   p    0.4    p
      LU                 24.5                       15.52                   1.70                3.8   p   3.3   p    0.6    p
      HU                 22.2                       11.26                   1.28                2.5       1.9        0.6
      MT                 25.3                       3.95                    1.37                  1       0.9        0.1
      NL                 24.5                       5.30                    1.73                1.3   p   0.7   p    0.5    p
      AT                 22.2                       13.49                   1.42                  3       2.5        0.5
      PL                 25.4                       3.55                    1.23                 09   p   0.9   p       :
      PT                 21.6                       5.55                    1.40                1.2   p   0.8   p    0.5    p
      SI                 21.1                       9.50                    1.25                  2   p   1.4   p    0.6    p
      SK                 25.5                       7.06                    1.24                1.8   p   1.6   p    0.1    p
      FI                 23.8                       12.63                   1.80                  3       1.6        1.3
      SE                 24.0                       12.51                   1.75                  3   p   1.6   p    1.5    p
      UK                 24.8                       6.87                    1.77                1.7   e   1.3   e    0.4    e
     Source: Eurostat, ESSPROS.
     *        support in % of GDP divided by the share of the young (0-19) in the population.
     **       e = estimated value, p = provisional value.

     The data collected by the OECD are not directly comparable. However, they do illustrate the
     value of tax breaks to families, which again display a wide variation across countries (see
     Figure 4.3).

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     Figure 4.3 Public spending on family benefits in cash, services and tax measures,
     2003 (in % of GDP)

     Source: OECD data base on family policies, 2006:,2340,en_2649_34819_37836996_1_1_1_1,00.html.

     In spite of the support for families, households with children remain exposed to a slightly
     higher risk of poverty than the population as a whole (see table 4.2 below). The risk of
     poverty is likely to have an impact on young couples thinking about starting a family of their
     own. This was confirmed by the replies to the 2006 Eurobarometer survey, which in particular
     mention adequate working, financial and housing conditions as prerequisites for having
     children (see chapter 2.2.4).

     Table 4.2 At-risk-of-poverty after social transfers, 2004 (in %)
                                                         With children   Total
                                                 BE                 18     15
                                                 CZ                 15       8
                                                 DK                  9     11
                                                 DE                 20     16
                                                 EE                 20     18
                                                 EL                 20     20
                                                 ES                 24     20
                                                 FR                 14     14
                                                 IE                 22     21
                                                 IT                 26     19
                                                 CY                 11     15
                                                 LV                 19     16
                                                 LT                 17     15
                                                 LU                 18     11
                                                 HU                 17     12
                                                 MT                 21     15
                                                 NL                 18     12
                                                 AT                 15     13
                                                 PL                 23     17
                                                 PT                 23     21
                                                 SI                  9     10
                                                 SK                 30     21
                                                 FI                 10     11
                                                 SE                 11     11
                                                 UK                 22     18
                                                 EU-25              20     16

     Source: Eurostat EU-SILC and national data.
     Note: Risk-of-poverty defined as income below 60% of the median income.

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     Table 4.1 and Figure 4.3 show that family support in the form of services (or benefits in kind)
     plays a major role in a number of countries, in particular the Nordic countries and France.
     Given its importance for reconciling professional and private life — and hence for achieving
     high employment rates — the Barcelona summit of 2002 set two targets for the availability of
     childcare, namely to provide, by the year 2010, childcare for at least 33of children aged 0-3
     and for 90% of children between the age of 3 and mandatory school age. Table 4.356 gives an
     overview of the progress achieved by 2003.

     Table 4.3 Provision of childcare in European countries in 2003
          Country           Childcare coverage rate         Childcare coverage rate   Public expenditure
                                   0–3 years                 3–compulsory school      on formal day care
                                  Target=33%                          age               as a % of GDP
                                                                 Target =90%
     BE (Flanders)                       81%                         100%
     BE (Wallonia)                       33%                          98%
     CZ                                  8%                           85%                    0.0%
     DK                                  56%                          93%                    1.7%
     DE                                  7%                           89%                    0.4%
     EE                                  22%                          79%
     EL                                  7%                           60%                    0.4%
     ES                                  10%                          98%                    0.1%
     FR                                  43%                         100%                    0.7%
     IE                                    :                            :                    0.2%
     CY                                    :                            :                      :
     IT                                  6%                           93%                      :
     LV                                  16%                          75%                      :
     LT                                  18%                          60%                      :
     LU                                  14%                          80%                      :
     HU                                  6%                           86%                      :
     MT                                    :                            :                      :
     NL                                  35%                         100%                    0.2%
     AT                                  9%                           82%                    0.4%
     PL                                  2%                           60%
     PT                                  19%                          75%                    0.2%
     SI                                  27%                          59%
     SK                                                               70%                    0.1%
     FI                                  21%                          70%                    1.2%
     SE                                  41%                          90%                    1.3%
     BG                                  7%                           74%                      :
     Source: Plantenga and Remery, 2005, see footnote 56.

     With the exception of a few countries, the level of coverage for the older children is already
     quite high. Ten countries meet the 90% target. By contrast, the provision of child care for the
     youngest age group is below 10% in several countries. Most child care services are partly
     subsidised. According to Plantenga and Remery, parents pay on average only 25-35% of the

     56       Plantenga J. and C. Remery, Reconciliation of work and private life: a comparative review of 30
              European countries, European Commission, Directorate-General for Employment, Social Affairs and
              Equal Opportunities, 2005.

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     cost. They find that, besides affordability, cultural norms about motherhood and the proper
     way to care for (young) children also limit the use of crèches. In the case of young children,
     leave arrangements and care provided by relatives (especially grandparents) are often
     preferred by many parents.
     The presence of children combined with the lack of services also has a clear impact on the
     employment situation of women. Table 4.4 shows that everywhere in the EU, except in
     Slovenia and Portugal, the employment rate of women caring for young children is lower than
     that of women without children.

     Table 4.4 Employment impact of parenthood for women*

                                     2001           2002            2003           2004            2005
                     EU-25           14.2           14.1            13.6            13.6            14.3
                     EU-15           12.6           12.7            12.2            12.5            13.3
                     EU-10           22.0           20.2            20.0            18.7            19.5
                     BE               1.7            3.1             6.6             1.7             2.1
                     CZ              43.6           41.8            38.9            41.0            39.2
                     DK                :             3.6             2.9             1.6             1.6
                     DE              21.9           21.4            19.7            20.3            26.5
                     EE              30.2           31.7            28.8            31.3            30.0
                     EL               4.8            5.5             6.0             6.6             3.5
                     ES               9.2            9.0             8.8             8.2             7.5
                     FR              11.9           11.5             9.9            11.4            10.2
                     IE              16.5           16.2              :             18.9            18.2
                     IT               4.9            4.9             5.1             5.9             6.8
                     CY               5.6            4.5             8.0             8.0             3.4
                     LV              12.8           12.8            19.1            17.6            18.0
                     LT               0.0            3.4             4.0             5.1             2.8
                     LU               9.2            5.4            10.9             8.2             7.0
                     HU              35.0           35.1            37.1            34.1            35.3
                     MT              26.2           18.6            22.6            15.7            17.2
                     NL              12.0           11.5            11.1             9.7             9.4
                     AT               6.8            8.8             6.2            11.2            14.4
                     PL              13.6           12.5            12.0             9.6            11.1
                     PT              -2.4           -1.2            -2.3            -3.7            -3.8
                     SI              -5.9           -5.1            -7.9            -5.1            -1.5
                     SK              27.8           29.7            30.2            29.5            34.5
                     Fl                :              :             12.9            15.7            15.7
                     UK              21.9           23.2            24.1            23.0            21.2
     * Difference in employment rates for women with children under 6 and women without children (age group 20-50).
     Source: EU Labour Force Survey — Spring data, LU 2003, 2004 and 2005: Annual average data, data not available for SE.
     Notes: Data may lack comparability due to changes in certain survey characteristics: between 2002 and 2003 for FR and LU,
     between 2003 and 2004 for IT and AT, between 2004 and 2005 for DE and ES. : means no data available. Flexibility in working hours and work organisation

     Part-time work has become a widely used option to reconcile work and family life. Table 4.5
     shows that part-time work is much more prevalent amongst women than men. In 2005, 33%
     of women in the EU had part-time jobs as compared to 7% of men. This high prevalence of
     part-time working among women relative to men shows again that it is mainly women who
     adapt their employment patterns and careers to the needs of family life.

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     Table 4.5 Share of part-time work 2004-2005 (in %)

                                                     Women Men
                                             BE             41      7
                                             CZ              8      2
                                             DK             33     13
                                             DE             44      8
                                             EE             10      5
                                             EL              9      2
                                             ES             25      5
                                             FR             31      6
                                             IE             32      6
                                             IT             26      5
                                             CY             14      5
                                             LV             12      8
                                             LT              9      5
                                             LU             38      3
                                             HU              6      3
                                             MT             19      5
                                             NL             75     23
                                             AT             39      6
                                             PL             14      8
                                             PT             17      7
                                             SI             11      7
                                             SK              4      1
                                             FI             19      9
                                             SE             40     12
                                             UK             43     11
                                             EU-25          33      7
     Source: Eurostat Labour Force Survey.

     Flexible working-time arrangements, such as flexitime systems or teleworking, may offer
     both mothers and fathers alternative opportunities for reconciliation. According to the Fourth
     Working Conditions Survey of the European Foundation for Improvement in Living and
     Working Conditions57, more and more Europeans are making use of flexible working-time
     arrangements (see Figure 4.4 below). In the surveyed countries, 48% of establishments offer
     some form of working time flexibility but only 25% allow extended flexibility (i.e. the
     possibility to accumulate hours for a day off or longer periods of leave). The use of flexitime
     is lower in Southern European countries and the new Member States than in the rest of

     57       For the report see At the 2006
              Forum on the Demographic Future of Europe, John Hurley of the Dublin Foundation summarised the
              results working time arrangements, see

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     Figure 4.4 Incidence of different forms of flexible working time arrangements, by
     country (%)

     Base: All establishments (management interviews).
     Source: European Foundation for Living and Working Conditions in Dublin, 2004-2005.

     The survey also confirms that parental leave is mostly taken up by women and that, even in a
     country like Sweden, men still take up only 17% of total parental leave. The take-up of
     parental leave, in particular by men, increases with the level of the replacement income.

     Figure 4.5 summarises the possibilities for workers to influence their daily working hours
     across Europe. Over half of all workers (56%) have their working time arrangements set by
     the company with no possibility of change, 9% of workers can choose between several fixed
     working schedules, 17% can adapt their working hours within certain limits (i.e. flexitime);
     and, in 18% of cases, it is the worker who decides on individual working hours (e.g. self-
     employed workers). Around 50% of workers in northern European countries can adapt their
     working time (to a certain extent) to their particular needs. In contrast, fewer than 25% of
     workers in southern and Eastern Europe are able to do this.

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     Figure 4.5 Working time discretion by country

     Source: Fourth Working Conditions Survey of the Dublin Foundation, 2005.

     A key factor influencing work/life balance found in the survey is the length of the working
     week. Over 40% of those who work long hours say they are dissatisfied with their work/life
     balance; by contrast, 85% of those who work less than 30 hours per week are happy with their
     work/life balance. Regular long working days (of over 10 hours in length) also have a
     negative impact. In particular working fathers report more dissatisfaction with their work/life
     balance than women. The Dublin Foundation suggests that the dissatisfaction of working
     fathers could be related to their inability and/or frustration to meet the changing social
     expectations regarding a father’s domestic role. This would suggest that there is potential for
     change among working fathers.

     Women still carry a disproportionate share of the negative impact of children on labour
     market participation. This is reflected in lower employment rates of women, a higher
     incidence of part-time working and the gender pay gap (see table 4.6). ). Indeed, female
     labour force participation is 15 percentage points below that of men, while part-time working
     is four to five times more prevalent among women. In addition, there is a large gap in the
     hourly pay earned by women and by men. In 2004, women’s average gross hourly earnings
     were 15% less than men’s across the EU, though with wide variations across Member States.

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     Table 4.6 Employment rate of women/men and Gender pay gap for 2004-2005 (in %)

                                             Women         Men           2004-2005
                      BE                      54           68                 6
                      CZ                      56           73                19
                      DK                      72           80                17
                      DE                      60           71                23
                      EE                      62           67                24
                      EL                      46           74                10
                      ES                      51           75                15
                      FR                      58           69                12
                      IE                      58           77                11
                      IT                      45           70                 7
                      CY                      58           79                25
                      LV                      59           68                15
                      LT                      59           66                16
                      LU                      54           73                14
                      HU                      51           63                11
                      MT                      34           74                 4
                      NL                      66           80                19
                      AT                      62           75                18
                      PL                      47           59                10
                      PT                      62           73                 5
                      SI                      61           70                 9
                      SK                      51           55                24
                      FI                      67           70                20
                      SE                      70           74                17
                      UK                      66           78                22
                      EU-25                   56           71                15
     Source: Eurostat Labour Force Survey.

     The empirical evidence suggests that promoting the reconciliation of a professional career
     with a fulfilling private life will result in higher employment rates, in particular for women,
     and higher fertility rates. But having a family will always bring additional work and
     responsibilities, which are currently to a large extent assumed by women and forces them to
     sacrifice professional career opportunities. Progress towards greater equality between women
     and men will therefore also require a more equal sharing of household and family work.
     Tables 4.7 and 4.8 illustrate how large the differences between women and men still are. Time
     use survey data show that women spend much more time than men doing domestic work and
     that they have less free time. The differences between women and men tend to be larger in
     southern and Eastern Europe. The Dublin Foundation’s Working Conditions Survey showed
     that part-time working women actually worked longer hours than full-time working men
     when counting both paid and unpaid work.

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     Table 4.7 and 4.8 Allocation of daily time for women and men aged 20 to 74 in Europe

                                                             Hours and minutes per day

                    BE      DE      EE      ES       FR       IT     LV       LT      HU      PL       SI      FI      SE      UK       NO
     work,         2:07    2:05    2:33     2:26    2:31    2:06     3:41    3:41    2:32    2:29     2:59    2:49    3:12     2:33    2:53
                   4:32    4:11    5:02     4:55    4:30    5:20     3:56    4:29    4:58    4:45     4:58    3:56    3:42     4:15    3:47
     Travel        1:19    1:18    1:06     1:05    0:54    1:14     1:20    1:04    0:51    1:06     1:02    1:07    1:23     1:25    1:11
     Sleep         8:29    8:19    8:35     8:32    8:55    8:19     8:44    8:35    8:42    8:35     8:24    8:32    8:11     8:27    8:10
     personal      2:43    2:43    2:08     2:33    3:02    2:53     2:10    2:22    2:19    2:29     2:08    2:06    2:28     2:16    2:08
     Free time     4:50    5:24    4:36     4:29    4:08    4:08     4:09    3:49    4:38    4:36     4:29    5:30    5:04     5:04    5:51
     Total          24      24      24       24      24      24       24      24      24      24       24      24      24       24      24
                                                             Hours and minutes per day

                    BE      DE      EE      ES       FR       IT     LV       LT      HU      PL       SI      FI      SE      UK       NO
     work,         3:30    3:35    3:40     4:39    4:03    4:26     5:09    4:55    3:46    4:15     4:07    4:01    4:25     4:18    4:16
                   2:38    2:21    2:48     1:37    2:22    1:35     1:50    2:09    2:40    2:22     2:40    2:16    2:29     2:18    2:22
     Travel        1:35    1:27    1:17     1:16    1:03    1:35     1:28    1:13    1:03    1:13     1:09    1:12    1:30     1:30    1:20
     Sleep         8:15    8:12    8:32     8:36    8:45    8:17     8:35    8:28    8:31    8:21     8:17    8:22    8:01     8:18    7:57
     personal      2:40    2:33    2:15     2:35    3:01    2:59     2:10    2:25    2:31    2:23     2:13    2:01    2:11     2:04    2:02
     Free time     5:22    5:52    5:28     5:17    4:46    5:08     4:48    4:50    5:29    5:25     5:34    6:08    5:24     5:32    6:03
     Total          24      24      24       24      24      24       24      24      24      24       24      24      24       24      24
     Source: Eurostat - National Time Use Surveys conducted between 1998 and 2004 by national statistical agencies and research
     Notes: Unspecified time use is included in 'Free time'.
     FR: In France, long periods spent on rest were coded as 'Sleep' and in the other countries as 'Rest', included here in 'Free time'.
     NO: encouraged reporting conversation as a main activity by diary instruction (coded as 'Socialising', which is part of 'Free time').
     National data were rounded, which may result in small discrepancies.

     Cross-country differences in gender equality at home appear to be linked to differences in
     fertility. In Northern European countries the increased labour force participation of women
     has been followed by an increase in men’s contribution to household work. Less egalitarian
     attitudes in Southern Europe may have acted as a brake on female labour force participation,
     as women often have to choose between raising children and paid work. A recent econometric
     study by De Laat and Sevilla Sanz58 found that the difference in an egalitarian attitudes score
     between the most and the least egalitarian country in their sample (Norway and Spain,
     respectively) explains a difference in fertility of up to 0.87 children.

     There is strong evidence that policies to support families and to promote gender equality do
     matter and that they can raise fertility rates. The highest birth rates in Europe can indeed be
     observed in those countries that have the most generous family policies and which also have

     58          De Laat, J. and A. Sevilla Sanz, ‘Working women, men’s home time and lowest-low fertility’, Essex
                 University ISER, Working Paper, No 23, 2006.

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     made most progress in gender equality. A study by the OECD59 has tried to simulate the
     effects of different policies on total fertility rates. The results presented in Box 4.2 should not
     be regarded as predictions of the most likely outcomes, but as an indication of the likely
     effects on fertility rates of various policies based on a very simplified set of assumptions. The
     policies considered are taxes and transfers that lower the direct costs of children, greater
     availability of part-time employment for women, longer periods of parental leave, and greater
     availability of formal childcare for preschool children. Despite the obvious limitations, the
     results suggest that these policies can help parents overcome the obstacles that prevent them
     from having the number of children they want.

     BOX 4.2 Policy simulation of the effect on fertility

     Notes: Countries are ranked in increasing order of the total fertility rates that could be achieved as a result of four sets of
     policies: i) a reduction in the direct costs of children (measured as the difference between the equivalised disposable income of
     a two-earner couple without children and that of a two-earner couple with 2 children, where the principal earner earns 67% of
     the earnings of an APW (Average Productive Wage), and the spouse 33%; ii) an increase in the availability of part-time
     employment to the level achieved in the three OECD countries where it is highest (Japan, the Netherlands and the United
     Kingdom); iii) an increase in the availability of formal childcare (the share of children below 3 years of age attending formal
     childcare) to the levels of the three countries where it is highest (Denmark, Sweden and the United States); and iv) an increase
     in the length of leave (both maternity and parental) to the levels of the four countries where it is the highest (Germany, France,
     Spain and Finland). The simulations allow for the possibility of substitution between longer parental leave and greater childcare
     availability. The combined effect of these policies, e.g. in the case of Japan, is an increase of the total fertility rate from a level of
     1.3 in 1999 to around 2.0.
     Source: OECD, see footnote 59.

     In addition to policies that promote better conditions for women and men wishing to raise a
     family, it may become increasingly important to address biological obstacles to fertility. As
     potential parents postpone the moment at which they decide to have children, fertility
     problems are becoming a more and more frequent obstacle to the realisation of their desire.
     The availability of Artificial Reproduction Techniques (ART), such as in vitro fertilisation,
     may also have an impact on a country’s total fertility rate. A recent study conducted by
     RAND60 suggests that, if the UK adopted the same policy regime concerning the availability
     of ART as is currently practised in Denmark, its fertility rate could go up by 0.07. This may
     not seem very much but would still have a sizeable impact on population growth in the long
     run. In fact, the size of the effect is comparable to the effects on fertility of policies considered

     59        D’Addio A. C. and M. Mira d’Ercole, ‘Trends and determinants of fertility rates and the role of
               policies’, OECD Social Policy Division, see
     60        Grant, J. and others, ‘Should ART be part of the population mix?’, RAND Europe, paper prepared for
               the 2006 meeting of the European Association of Human Reproduction and Embryology in Prague.

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     in the above-mentioned OECD study. More research, taking account of possible deadweight
     effects and involving more countries, is needed to confirm this result.

     4.2.3.    Conclusion

     There is convincing evidence that better conditions for families, increased gender equality,
     higher female employment and more support for those who would like to start a family would
     have a positive impact on fertility rates in the EU. However, it should also be clear that the
     imminent challenge of demographic ageing cannot be addressed by raising fertility rates.
     Higher fertility rates will affect the balance between active and retired people only after two
     decades at least — before that, significant investment in the education of these additional
     children will be required. However, helping people to achieve their goal of starting a family
     and raising children is now recognised as an important policy goal. The Barcelona target of
     access to childcare, the Commission’s Gender equality Roadmap and the Member States’
     European Pact for Gender Equality specifically address the need to further support gender
     equality policies, including better work/life balance measures, to help meet the demographic

     4.3.      Promoting employment in Europe

     The second strand of the constructive response to the demographic challenge presented by the
     Commission in its communication on the demographic future of Europe is the need to raise
     employment rates. Demographic ageing will reduce the population of working age (generally
     defined as people aged 15-64 years) while the number of people over 65 (generally assumed
     to be retired) will increase. The old-age dependency ratio, i.e. the number of people over 65
     relative to the population of working age, will become less favourable and the active
     population will have to shoulder a heavier burden of providing for the elderly. However, what
     matters with regard to the production and distribution of resources is not the ratio between
     these two age groups but the ratio between people actually in employment and people
     receiving benefits. Raising employment rates, improving integration within the labour market
     — especially for young people and disadvantaged groups such as the disabled, ethnic
     minorities and immigrants — and encouraging older workers to stay longer on the labour
     market can help maintain a good balance between the active and the retired in a context of
     demographic ageing. Indeed many Member States have considerable scope for raising their
     employment and economic performance levels through higher labour force participation.

     4.3.1.    Potential for more jobs of better quality

     As the baby boom cohorts reach retirement age and smaller young cohorts enter the labour
     market, the balance between the inactive and active segments of the population could worsen
     significantly. However, Europe has a huge potential to compensate for this demographic
     effect by raising levels of employment. The European Council decisions of Lisbon and
     Stockholm which set targets for overall employment, as well as rates for women and older
     workers, are indicative of the labour market potential inherent in Europe. In 2005 the overall,
     female and older people’s employment rates were respectively around 6.4 and 7.5 percentage
     points below the Lisbon and Stockholm employment targets for 201061. Rates for older

     61       Employment in Europe 2006, European Commission, Directorate-General for Employment, Social
              Affairs and Equal Opportunities.

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     workers aged 55-64 actually improved most in the period 2000-2005, rising by approximately
     6 percentage points (see figure 4.7 below).

     If individual Member States were to bring up employment rates on the whole, and for women
     and 55-64-year-olds in particular, to the levels of the current three best-performing countries,
     this would make a major contribution to tackling the demographic deficit. As shown in the
     chart below, the greatest improvements would have to be made in securing higher
     employment rates for older workers. The next greatest challenge lies in raising rates for
     women, while the best overall employment rates are somewhat more within reach.

     Figure 4.6 Potential gap in employment rate (female, senior) in the EU (in %)*






























                                                                                 Female empl       Empl. 55-64

     Source: Eurostat.
     * Calculated with respect to the three best performing countries.

     Translated into absolute numbers of jobs that need to be created, improving labour market
     performance in these areas has a substantial potential for making up the job deficit foreseen in
     2050 as compared to 2010 levels (second column in Table 4.8 below). However, calculating
     the contribution of a 25% increase in employment rates for 65-69-year-olds reveals that the
     potential employment contribution that can be expected from this group is likely to be rather

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     Table 4.8 Main employment results from the demographic projections, in thousands
                        I                  II                 III             IV              V             VI            VII
                  Estimated                                                                             Increase
                                     Decline in         Increase in                                                    of 25%
                 employment                                                                               in ER
                                    comparison            female          Increase      Decrease                        in ER
                  in 2050 for                                                                            for 55-
                                     with 2010         employment         in ER (4)     in UR (5)                      for 65-
                  20-64 year-                                                                           64 year-
                                        (2)               rate (3)                                                    69 year-
                    olds (1)                                                                             olds (6)
                                                                                                                       olds (7)
      EU-25         157828              33963              15281            21090          6562           11858          1434
      EU-15         136669              25979              12193            15561          4394           9171           1176
      NMS-           21558              7726               3001             5131           1986           2800            258
      EURO          104612              23930              11177            14685          4007           8639           936
      BE             3755                 404               436              632           128             417           31
      BG             1557               1299                213              428           110             222           21
      CZ             3250               1355                266              303           108             238           32
      DK             2295                 218                -5              -29            21              10           14
      DE             26780              7749               1924             3049           1264           1982           240
      EE              436                 142                18               37            21              15            4
      IE             2058                -173               169              148            -1              79           17
      EL             3459               1010                635              683           173             299           37
      ES             13623              4696               2197             2389           716            1035           140
      FR             23242              1674               1697             2646           1087           1833           183
      IT             16006              5848               3116             3939           452            2009           164
      CY              408                 -39                23                9           114              17            4
      LV              708                 262                40               75            39              38            7
      LT             1092                 334                62              121            71              65           11
      LU              242                 -44                29               32             1              23            2
      HU             2949                 929               413              690            39             363           28
      MT              164                  -9                54               53             3              21            2
      NL             7168                 458               270              166             2             347           47
      AT             3068                 517               191              253             6             355           26
      PL             10246              3865               1910             3457           1494           1779           144
      PT             3657               1105                164              203            72             138           34
      RO             5820               2871                692             1204           182             630           66
      SI              691                 227                35               61            11              81            7
      SK             1611                 632               201              327           217             254           19
      FI             1978                 327                40              121            84              71           16
      SE             4261                -105               -71              -42            72             -94           28
      UK             25849              1501                774              598            32             468           198
     Notes: (I) Employment in 2050 is estimated as the current employment rate multiplied by the expected population of 20-64-
     year-olds based on Eurostat’s ‘central variant’ scenario.
     (II) Difference between the estimated number of jobs in 2010 and in 2050.
     (III) — (VI) For each case, estimated number of jobs gained if the corresponding rate reaches the current average level of the
     3 best-performing EU-25 countries.
     (VII) Estimated number of jobs gained if the employment rate for 65-69-year-olds is increased by 25% in each country.
     ER = employment rate; UR = unemployment rate.
     Source: Own calculations based on Eurostat population projections and Labour Force Survey data.

     The high prevalence of part-time work amongst women also represents an untapped potential
     for raising the number of hours worked in Europe.

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     4.3.2.     Unlocking the potential for increased employment

     Raising levels of educational attainment is one of the keys to unlocking the potential for
     increased employment in Europe62. Skill levels are significantly related to employment rates,
     with employment generally being higher the greater the educational attainment level. In 2005
     the average employment rate was 82.5% among the high-skilled in the EU and 68.7% for the
     medium-skilled (those having completed upper secondary education), whereas for the low-
     skilled it was only 46.4%63 (see table 4.9).

     Table 4.9 Employment (ER), unemployment (UR) and activity rates (AR) by education
     levels in 2005(age group 15-64, in %)
                  Total, irrespective          High education      Medium education           Low education
                  of education level                level               level                     level
                   ER      UR     AR          ER     UR     AR     ER    UR     AR          ER     UR     AR
     BE           61.0     8.1   66.4         83.6   3.8   86.9    66.0  8.2   71.9         40.0   13.7  46.3
     CZ           64.7     7.8   70.2         85.0   2.1   86.8    72.0  7.1   77.4         21.3   27.3  29.3
     DK           75.5     4.9   79.4         85.7   3.6   88.9    78.3  4.8   82.3         58.3   7.1   62.8
     DE           65.3    11.4   73.7         82.7   5.8   87.8    69.2  11.5  78.2         42.1   19.0  52.0
     EE           64.9     8.3   70.8         82.6   3.2   85.3    69.9  10.1  77.7         28.3   15.2  33.3
     EL           60.3     9.8   66.8         81.4   7.7   88.2    61.0  11.5  68.9         50.5   9.0   55.4
     ES           63.2     9.4   69.7         80.4   6.6   86.1    66.0  9.1   72.6         55.3   11.4  62.5
     FR           62.8     9.3   69.3         76.9   6.6   82.3    68.7  8.2   74.9         47.2   13.6  54.6
     IE           67.1     4.3   70.2         85.7   2.3   87.8    72.4  3.7   75.2         48.9   7.4   52.7
     IT           57.8     7.6   62.5         79.5   6.0   84.6    67.6  6.6   72.4         45.8   9.2   50.4
     CY           68.7     5.5   72.6         85.9   4.0   89.5    73.1  5.5   77.4         52.2   6.9   56.1
     LV           63.0     9.2   69.4         85.6   3.9   89.1    68.9  8.9   75.6         33.1   18.6  40.7
     LT           62.6     8.6   68.5         87.5   3.8   91.0    67.6  9.7   74.9         25.1   16.0  29.9
     LU           63.6     4.5   66.6         82.5   3.5   85.5    63.0  4.2   65.8         50.5   6.2   53.8
     HU           56.8     7.1   61.2         82.6   2.5   84.8    64.9  6.9   69.7         28.1   14.2  32.7
     MT           53.6     7.9   58.2         82.7   2.7   84.9    76.0  3.7   78.9         44.5   10.6  49.8
     NL           73.2     4.8   76.9         85.6   2.9   88.2    77.5  4.3   81.0         58.2   7.7   63.0
     AT           67.6     5.3   71.3         83.6   3.1   86.4    72.5  4.5   76.0         45.1   10.4  50.3
     PL           52.2    18.3   63.9         81.1   6.8   87.0    56.4  19.4  70.0         22.9   30.1  32.7
     PT           67.6     7.7   73.2         87.5   4.4   91.5    63.5  7.5   68.7         65.5   8.3   71.5
     SI           66.0     5.9   70.1         86.5   3.1   89.2    70.7  6.0   75.2         40.7   9.1   44.7
     SK           57.4    16.3   68.6         83.4   5.2   88.0    66.6  14.4  77.8         13.1   53.1  28.0
     FI           69.2     9.7   76.6         84.1   4.6   88.1    72.8  9.5   80.5         47.0   18.5  57.7
     SE           72.6     8.8   79.6         86.0   4.7   90.2    78.7  7.8   85.3         52.0   17.1  62.8
     UK           71.5     4.6   74.9         87.4   2.5   89.7    76.1  4.8   80.0         49.2   9.2   54.1
     Total        63.6      9.1      70.0     82.5   5.0   86.9    68.7     9.3     75.8    46.4     12.9    53.2
     Men          71.1      8.5      77.7     85.9   4.6   90.1    75.1     8.7     82.3    56.8     11.7    64.4
     Women        56.2      9.9      62.4     79.1   5.5   83.7    62.2     10.0    69.1    36.3     14.5    42.5
     Source: Eurostat Labour Force Survey, spring results

     Fortunately, the level of educational attainment among the EU-25 working age population
     continues to rise, contributing to a more employable and adaptable workforce and in turn to

     62       The revised Employment Guidelines adopted by the European Council in their decision of 12th July
              2005 (2005/600/EC) specifically cover this area: Guideline 23, which calls for expanding and
              improving investment in human capital through specified measures including lifelong learning
              strategies, and Guideline 24, which calls on Member States to adapt education and training systems in
              response to new competence requirements.
     63       Employment in Europe 2006, European Commission, Directorate-General for Employment, Social
              Affairs and Equal Opportunities.

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     increased employment and participation rates. In 2005, the high-skilled (i.e. those having
     completed tertiary education) represented close to 20% of the working age population, while
     the low-skilled (those with only lower secondary education or below) represented just under
     33%64. This compares with shares of 17.6% and 36.2% respectively in 2000 and reflects the
     ongoing improvements in the level of human capital in the EU. This has mainly been the
     result of improvements in the skill composition of the female working age population, where
     the high-skilled share has increased 3 percentage points and that of the low-skilled fallen by
     4.3 percentage points, compared to changes of 1.7 and -2.5 percentage points respectively for
     men. However, present levels of education still show that there is great potential for
     increasing employment by raising these levels even more.

     Women have accounted for the greatest growth in employment in recent years65, both in
     relative and absolute terms. Indeed, the overall increase in female employment has been more
     than twice that for men. This reflects the recent trend of rising labour market participation for
     women, among whom activity rates increased from 60% to 62.5% between 2000 and 2005
     against an increase in the male rate of only 0.4 percentage points.

     In many Member States, however, especially those in the north of Europe, a disproportionate
     number of women who combine employment with having children work in part-time jobs. In
     2005, almost 40% of women with children, whether under 6 or older, worked part-time (i.e.
     for less than 30 hours a week), while around 10% worked under 15 hours a week66 (see Figure
     4.7 below). Both figures are around twice the rates for women without children. Such jobs not
     only yield less income than full-time ones but are often inferior in terms of their status and the
     responsibilities they involve, aspects which equally need to be taken into account when
     assessing the opportunity cost to women of having children.

     64     Ibid.
     65     Ibid.
     66     ‘Is the pressure on parents of young children too heavy?’ Policy brief prepared for the European
            Commission’s Directorate-General for Employment, Social Affairs and Equal Opportunities by the
            Social Situation Observatory, Social Inclusion and Income Distribution Network.

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     Figure 4.7 Average hours worked per week by women and men (aged 20-49) with or
     without children (aged 0-6) in EU Member States-2004

     Source: Eurostat, European Labour Force Survey, 2004.
     Note: Data are not available for DK, IE and SE.

     Having children has a more pronounced effect on the employment of women with low
     education (no qualifications beyond compulsory schooling) than those with higher levels. In
     the EU-25 as a whole in 2004, the proportion in employment of women aged 25-49 with low
     education and children under 6 was 20 percentage points lower than for women with the same
     level of education without children, which averaged just under 40%. For women with children
     aged 6-11, the proportion was over 7 percentage points lower. By contrast, for women with
     tertiary education, the difference in employment rates between those with children under 6
     and those without young children was 12 percentage points and for those with children aged
     6-11 less than 2 percentage points.

     Prolonging working lives by promoting the postponement of retirement is another key to
     unlocking the potential for increased employment. Pension reforms in the majority of Member
     States are already raising the labour market exit age, but much can still be achieved in this

     The statutory retirement age in most Member States is currently 65. In France, however, the
     statutory retirement age is 60 and in several other countries including Belgium, Italy, Austria
     and the United Kingdom, there is a separate lower age for women. The average exit age in
     2005 for the EU-25 was estimated to be 60.4 years (see figure 4.10). Employment amongst

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     55-64-year-olds increased by almost a quarter in the period 2000 to 200567, indicating that
     pension reforms and other incentives put in place by Member States are having a clear effect.

     Figure 4.8 Healthy life expectancy, life expectancy and average exit age from the
     labour market in the EU-15, 2003










                                    Males                                                Females

                                     Life expectancy   Healthy life expectancy   Average exit age

     Source: Eurostat Labour Force Survey.

     Achieving longer working lives also involves addressing the causes of early retirement. Data
     available on the reasons given for their inactivity by 55-64-year-olds indicate that many
     individuals were already retired. However, as the figures below show, many were inactive due
     to disability or the onset of illness. According to table 4.10, the differences across countries
     are striking and to a great degree probably reflect different institutional arrangements rather
     than differences in health status.

     67        Employment in Europe 2006, European Commission.

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     Table 4.10 Percentage of population and causes of inactivity for inactive persons aged
     50-64, 2005 (in %)
                                          Percentage of inactive individuals
     Ageing and         Personal/                                   Believe job             Inactive as
                                                       Illness/                    Other
      the labour          family         Retirement                     not                  % of total
                                                      disability                  reasons
        market           reasons                                     available              population
     BE                     21               45            12            6          15          52
     CZ                     1                71            24            1           3          38
     DK                     4                50            41            :           3          29
     DE                     13               56            11            4          15          36
     EE                      :               52            33            9           :          32
     EL                     21               39            7             1          32          47
     ES                     39               18            23            4          15          45
     FR                      :               45             0            0          54          44
     IE                      :                1             1            :          96          39
     IT                     9                43            7             6          35          55
     CY                     59               20           17             :           3          38
     LV                     7                57            20            8           6          35
     LT                     3                52            33            6           4          36
     LU                     43               41            14            0           1          51
     HU                     3                67            22            4           4          51
     MT                     46               27           11             :          13          58
     NL                     9                39            32            3          17          40
     AT                     16               70            6             1           6          51
     PL                     6                41            36            6          11          54
     PT                     21               47           16             :          16          37
     SI                     9                61            23            3           4          50
     SK                     1                72            23            1           2          44
     FI                     3                33            44            5          14          33
     SE                     2                25            60            2          11          23
     UK                     5                38            16            0          40          34
     EU-25                  11               44            16            3          25          43
     Source: Eurostat Labour Force Survey.
     Note: Other reasons include education and volunteer work.

     The fact remains however, that Europeans are living longer in good health than ever before in
     history (see figure 4.9). The increase in healthy life expectancy signals the potential for
     greater labour market participation amongst those members of society who are currently
     retiring well before statutory retirement age.

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     Figure 4.9 Life expectancy in good health in 2003

                 40           45         50            55           60            65   70   75   80


                                                            Females       Males

     Source: Eurostat.
     Note: Provisional value for PT, all others estimated with the exception of CY.

     4.4.             A more productive and dynamic Europe

     The third response to the demographic challenge identified by the Communication on the
     demographic future of Europe is the improvement of productivity. Once the population of
     working age has started declining and no further improvements in employment rates can be
     expected, Europe’s economic growth will depend on rising productivity alone. This has to be
     boosted by structural reforms to allow the less productive countries to catch up with the more
     advanced countries. Reforms will foster the development and uptake of new technologies as
     well as structural change in response to a changing environment. One driving factor behind
     this structural change will be the rising demand of older people for goods and services that are
     well-adapted to their specific needs. This ‘silver economy’ will create new business
     opportunities and markets.

     4.4.1.           The potential to raise productivity

     The decline in the working age population of the EU as a whole is already expected to start in
     2010, but further increases in employment rates could ensure further employment growth up
     to 2017. Thereafter, economic growth and improvements in living standards will become
     dependent on increases in productivity. In fact, labour productivity gains already account for
     two-thirds of the average economic growth recorded in the EU-25 between 2000 and 2005.
     The most obvious indication of the scope for productivity growth is the productivity gap
     between the highest performing countries and the rest. Table 4.11 presents productivity per
     hour in 2004 relative to the EU-15 average. Leaving aside Luxembourg, the EU Member

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     States with the highest productivity per hour worked are Belgium, Ireland and the
     Netherlands, all exceeding the EU-15 average by about 20% (nearly 30% in the case of
     Belgium). Productivity in the US is close to the level of the EU productivity leaders. Catching
     up with the productivity leaders represents a considerable potential for accelerated growth in
     most Member States, in particular those that have joined the EU since 2004.

     Table 4.11 Productivity per hour relative to the EU-15 average

                                                        1995          2000    2004
                                               EU-15    100.0      100.0      100.0
                                               EA       105.6      104.3      101.6
                                               EA13       :        102.5      101.4
                                               EA12     103.9      102.8      101.6
                                               BE      131.3 e    126.4 e    131.4 e
                                               CZ      44.2 e       45.3       52.1
                                               DK       105.1      104.8      101.1
                                               DE       109.0      106.6      109.7
                                               EE         :         34.0       41.1
                                               IE      96.9 e     112.0 e    120.3 e
                                               EL        60.6       64.9       71.6
                                               ES        93.7       87.5       88.5
                                               FR       116.1      119.1     117.4 f
                                               IT       103.3      100.5      91.0 f
                                               LV         :       30.6 e     35.4 e
                                               LT      29.9 e       34.4       43.8
                                               LU      145.4 e    150.7 e    157.7 e
                                               MT         :       76.6 e     71.5 e
                                               NL      113.7 e    115.7 e     118.6
                                               AT       100.0      100.1       99.1
                                               PL         :       41.4 e     45.6 e
                                               PT      60.2 e     66.0 e      59.5 f
                                               SI         :       61.0 e     67.9 e
                                               SK      38.7 e       46.7       56.0
                                               FI        93.7       98.3       95.3
                                               SE        99.3      101.8      101.9
                                               UK      90.0 e     94.3 e     99.7 e
                                               US       109.5      111.4      115.3
                                               JP      76.4 e     77.2 e      80.8 f
     Source: Eurostat.
     Note: (e) = estimated value, (f) = forecast.

     Even the productivity leaders can accelerate their growth by further raising general education
     levels, removing obstacles to innovation and structural change, and boosting research and
     development leading to new products and more efficient production processes. However, the
     potential to move the production frontier is harder to quantify than the catch-up potentials.

     4.4.2.      Unlocking the potential for productivity growth

     Labour productivity depends to a large extent on previous investment in human capital. Table
     4.12 shows that in 2005 around 15% of all young people in the EU-25, 6 million persons aged

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     18 to 24, came under the category of early school-leavers68. The Lisbon target agreed to by
     the Member States for this category is to reduce early school-leaving to below 10%. The
     proportion of early school-leavers was particularly high among men and in some Member
     States more than one third of young men had dropped out of school. These early school-
     leavers will have poor employment prospects, their risk of being unemployed will be much
     higher than average and if they do find work, it will tend to be low-productivity and low-
     quality jobs.

     Table 4.12 Early school-leavers in %, 2005

                                                      Women Men
                                             BE              11     15
                                             CZ               7      6
                                             DK               8      9
                                             DE              14     14
                                             EE              11     17
                                             EL               9     18
                                             ES              25     36
                                             FR              11     15
                                             IE              10     15
                                             IT              18     26
                                             CY              11     27
                                             LV               8     16
                                             LT               6     12
                                             LU              10     17
                                             HU              11     14
                                             MT              39     43
                                             NL              11     16
                                             AT               9      9
                                             PL               4      7
                                             PT              30     47
                                             SI               3      6
                                             SK               6      6
                                             FI               7     11
                                             SE               8      9
                                             UK              13     15
                                             EU-25           13     17
     Source: Eurostat.

     Another important indicator of educational attainment is the upper-secondary education
     completion rate among 20-24-year-olds. Upper secondary education is the phase when the
     majority of young people prepare for transition into the labour market. This rate has stagnated
     at around 77% since 2000 (74% for men, 79% for women), as against the Lisbon target
     agreed by the Member States of at least 85%. Table 4.13 shows that in 2005 only five
     Member States had reached this target for men. Among 22-year-olds, a larger share of women
     had completed upper secondary education than men. This is reflected not only in the EU
     average but also in the figures for almost every single Member State. The young cohorts are
     on average achieving a higher level of educational than earlier cohorts. The share of the total
     population having completed secondary education in Member States ranges from 26% up to
     90% and is generally lower than that of women and men aged 22.

     68       Percentage of the population aged 18-24 with at most lower secondary education and not in further
              education or training.

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     Table 4.13 Educational attainment in 2005 (% completing secondary education)*

                                               Women                 Men
                                                       aged 20-24
                             BE                   85                  76                  66
                             CZ                   90                  91                  90
                             DK                   78                  75                  81
                             DE                   72                  70                  83
                             EE                   87                  75                  89
                             EL                   89                  79                  60
                             ES                   68                  55                  48
                             FR                   84                  81                  66
                             IE                   89                  83                  65
                             IT                   78                  68                  50
                             CY                   89                  72                  65
                             LV                   87                  77                  84
                             LT                   90                  81                  87
                             LU                   76                  67                  66
                             HU                   85                  81                  76
                             MT                   52                  45                  26
                             NL                   79                  71                  72
                             AT                   88                  84                  80
                             PL                   92                  88                  85
                             PT                   57                  40                  26
                             SI                   94                  88                  81
                             SK                   92                  91                  88
                             FI                   87                  83                  79
                             SE                   89                  87                  83
                             UK                   77                  78                  71
                             EU-25                80                  74                  69
     * Percentage of those aged 20-24 and total population who have successfully completed at least upper-secondary education

     Source: Eurostat.

     A good initial education provides the basis for lifelong learning which is vital for keeping
     skills up-to-date and remaining employable. Lifelong learning can be measured by looking at
     participation in training of people aged 25-64. For this group the Lisbon target agreed to by
     the Member States is 12.5%. Table 4.14 shows that in southern European countries and in
     most new Member States the likelihood of having recently participated in training is lowest
     and often hardly exceeds half the EU-15 average. Generally, older workers tend to be less
     likely to participate in training in all Member States69.

     69       A more extensive discussion on education can be found in the Commission paper "Progress towards the
              Lisbon Objectives in Education and Training",

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     Table 4.14 Life Long Learning: % of workers between 25-64 having participated in
     some form of training during the last 4 weeks

                                     2005     Total        Men    Women
                                    EU-27      9.7         8.9     10.4
                                    EU-25     10.2         9.4      11
                                    EU-15     11.2         10.4    12.1
                                    EU-10      5.3         4.6       6
                                    EU-12     10.5         9.8     11.3
                                    BE         8.3         8.2      8.5
                                    BG         1.3         1.3      1.2
                                    CZ         5.6         5.2      5.9
                                    DK        27.4         23.6    31.2
                                    DE         7.7           8      7.4
                                    EE         5.9         4.3      7.3
                                    IE         7.4         6.2      8.6
                                    EL         1.9         1.9      1.8
                                    ES        10.5         9.7     11.4
                                    FR         7.1         6.9      7.2
                                    IT         5.8         5.4      6.2
                                    CY         5.9         5.4      6.3
                                    LV         7.9           5     10.6
                                    LT          6          4.2      7.7
                                    LU         8.5         8.5      8.5
                                    HU         3.9         3.2      4.6
                                    MT         5.3         6.1      4.5
                                    NL        15.9         15.6    16.1
                                    AT        12.9         12.3    13.5
                                    PL         4.9         4.3      5.4
                                    PT         4.1           4      4.2
                                    RO         1.6         1.5      1.6
                                    SI        15.3         13.6    17.2
                                    SK         4.6         4.3       5
                                    FI        22.5          19     26.1
                                    SE        32.1         27.9    36.5
                                    UK        27.5          23      32

     Source: Eurostat New Cronos.

     As regards the gender dimension, in most countries women participated more in lifelong
     learning than men, independently of their educational attainment levels. Persons with higher
     initial educational attainment levels and younger generations also do more training: highly
     educated people participate seven times more in lifelong learning those with a low level of
     education, while participation decreases after the age of 34.

     In order to compete successfully in the knowledge economy, tertiary education is becoming
     increasingly important. The development of new technologies and their transformation into
     new products and services and better production methods requires highly skilled graduates.
     Yet, at present the EU invests approximately 1.2% of GDP in tertiary education compared to
     nearly 2.9% in the US.

     A lack of top-level graduates may limit the scope for raising the overall level of investment in
     research and development. But inadequate funding of research may also lead to a brain drain

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     with many highly qualified researchers moving to centres of excellence elsewhere. Figure
     4.10 shows that there are large differences between the Member States in the amount of
     money spent on R&D. Sweden and Finland are the two best ranked countries with around
     3.5% of GDP. The EU average is below 2% while R&D spending in the US represents close
     to 2.7% of GDP.

     Figure 4.10 R&D Intensity (Gross domestic expenditure on R&D (GERD) as % of GDP)

     (1) EL: 2003; BE, IT, MT, NL, SI, UK: 2004.
     (2) PL: 2008; IE: 2013; UK: 2014.
     (3) IE: The target is 2.50% of GNP in 2013.
     (4) EU-25: The EU-25 R&D intensity for 2005 was estimated by DG Research.
     EU-25: The EU-25 R&D intensity for 2010 results from the aggregation of the targets set by the Member States (including
     estimated targets for IE, PL and the UK).
     (5) Member States have been ranked according to the current level of R&D intensity from left to right.
     Taken from the annex to the 2006 Annual Lisbon Progress Report: Macro-economic, micro-economic and employment
     issues, European Commission.

     4.4.3.     Ageing consumers and the ‘silver economy’

     Europe, together with Japan, will be the first region in the world to experience rapid
     population ageing. This will result in major shifts in demand patterns towards goods and
     services adapted to the needs of the elderly. Europe has the opportunity to become a world
     leader in these new markets for older consumers.

     The size of these new markets will depend on the number of older consumers and on their
     purchasing power, which is more difficult to assess. According to the AARP (the American
     Association of Older People), consumers over the age of 45 were already responsible for more
     than half (52%) of total consumer spending in the United States in 2001, up from 47% in
     1984. Between 1984 and 2001, the total average annual expenditure of older consumers in the
     US increased at a greater rate (+8%) than that for all consumers (+6%), largely reflecting the
     ageing of the baby boomers. Given that the average retirement incomes of many pensioners in

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     the EU are comparable or even better than those in the US, thanks to higher replacement rates,
     a similar rise in the purchasing power of older persons as a group can be expected in the EU70.
     In a recent study, the Deutsches Institut for Wirtschaft (DIW)71 has confirmed the increasing
     importance of the older generation for the economy. Persons over 60 are already responsible
     for almost one third of total private consumption in Germany. This share is expected to
     increase on purely demographic grounds to more than 40% in 2050. Total consumer spending
     in Germany is expected to decrease 6% by 2050 compared to 2003. This decrease is likely to
     affect all age categories except persons older than 75. Demographic ageing will lead to a
     reduction in consumer spending on all goods and services except for health and long-term
     care. Ageing has already started to influence consumer spending in Germany. Over the last 10
     years, persons over 75 have almost doubled their consumer spending from €43 to €80 billion.
     The DIW study predicts that the growing size of this age group will lead to another doubling
     of their spending to €168 billion by 2050.
     The Dutch Ministry of Social Affairs has recently published a report on the future income
     situation of older Dutch citizens72. Figure 4.11 shows the average disposable income for
     60 000 households in 2006 according to age. Disposable income peaks at the age of 40.
     Thereafter it starts to decline as a result of decreasing labour force participation and
     stagnating career profiles. At the official retirement age of 65 there is a slight increase.
     Pension income at the age of 80 is lower than at the age of 65, as there were in the past fewer
     opportunities to accumulate a second-pillar pension.

     Figure 4.11 Disposable household income according to age, 2006

     Source: Dutch Ministry of Social Affairs 2006, MICROS.

     Figure 4.11 also displays equivalised income (correcting for differences in household
     composition). Equivalised income remains almost flat from the mid-20s to 80 years of age.
     The report thus concludes that older people enjoy income levels that are similar to those of
     people between 30 and 64 years of age. However, it should be noted that the relative income

     70       Gaberlavage, G., ‘Beyond 50.04: A Report to the Nation on Consumers in the Marketplace’, Research
              Report, AARP Public Policy Institute, May 2004.
     71       Buslei, H., E. Schulz and V. Steiner, Auswirkungen des demographischen Wandels auf die private
              Nachfrage nach Gütern und Dienstleistungen in Deutschland bis 2050, DIW Berlin, 2006,
              commissioned by the ‘Bundesministerium für Familie, Senioren, Frauen und Jugend’.
     72       ‘Future income of older people’, Working document, Dutch Ministry of Social Affairs, 2006, in Dutch

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     situation of older people in the Netherlands is very good compared to that of some other
     Member States.

     The information on income gives an incomplete picture of purchasing power. Wealth tends to
     be concentrated in the hands of older people, notably in the form of home ownership, which,
     for many households, represents their most important private asset, with the possible
     exception of private pension entitlements. Financial instruments such as reverse mortgages
     may allow older people to use housing wealth for consumption purposes, which could boost
     the purchasing power of the elderly.

     The combination of good supply conditions (high levels of education, R&D, responsive and
     flexible markets) and the growing purchasing power of older consumers offers a huge new
     potential for economic growth, sometimes referred to as the ‘silver economy’. There is no
     precise definition of this concept, so there are no statistics measuring the progress towards the
     ‘silver economy’. This is not a single new sector of the economy, but rather a wide range of
     age-related products and services in many existing sectors, including information and
     communication technologies, financial services, housing, transport, energy, tourism, culture,
     infrastructures, and local services as well as long-term care.

     BOX 4.3 A European network to promote the ‘silver economy’
     An interesting illustration of what may be possible under the heading of the Silver Economy
     is provided by the SEN@R network73. This network brings together 12 EU regions,
     representing 6 countries and 53 million inhabitants, with the aim to develop new ageing-
     related goods and services opportunities. Within the network, special interest groups have
     been set up around themes such as financial services, culture and tourism, health and life
     style, and independent living. In 2006 the network held a second large Silver Economy
     conference in Kerkrade (NL), at which many interesting examples were presented74.
     The European Central Bank has recently presented an overview of the consequences of ageing
     in the banking sector75. Banks may face a decrease in business as a result of lower interest
     income and a declining demand for traditional services such as personal credit and mortgages.
     On the other hand, they could increase their business in other areas by offering new products
     tailored to senior customers (e.g. reverse mortgages), thus compensating for the decreasing
     demand for credit and mortgages among younger customers. There will also be a growing
     demand for asset management and advisory services. Banks will also have to adjust to new
     risks (i.e. longevity risk) which are linked to some of the new products such as annuities.
     Furthermore, the traditional boundaries between banks, insurance companies and investment
     companies are likely to become blurred.

     Older people also represent an important demand factor as the main consumers of health and
     long-term care services. The increased demand for these services is going to create many new
     jobs. At the same time, available public resources have to be used in a rational way to ensure
     financial sustainability. One way to limit the need for expensive institutional care is to enable
     older people to remain in their homes as long as possible. Information and Communication
     Technologies (ICT) in combination with both formal and informal care may make this

     75     Maddoni, A. and others, ‘Macro economic implications of demographic developments in the Euro
            area’, ECB occasional paper series, No 51, August 2006.

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     feasible for much larger groups of older people than is currently the case. Even many frail
     elderly people suffering from chronic diseases could, thanks to the right technologies,
     continue to live independently.

     BOX 4.4 Products and services for independent living based on new technologies76

     Older people are more likely to suffer from functional limitations in areas such as mobility,
     vision, hearing and in some aspects of cognitive performance. Specifically designed ICT-
     based assistive technologies can be of great benefit. In particular, the design-for-all approach
     appears very promising for the development of new products. There are three domains where
     ICT applications may particularly benefit older persons with limitations.

     - In the assistive technology domain, ICT-based products are designed to compensate for
     motor, sensory and cognitive difficulties frequently experienced by older adults. For instance,
     speech technology has been deployed in assistive technology applications during recent years.
     Portable devices have been developed to detect lost objects like a key, to support people with
     light to moderate memory loss. Also personalised route guidance systems for travelling or use
     at home have been developed for elderly persons with impaired mobility. In the longer run,
     more powerful devices are expected, including robots designed to support dependent people
     in carrying out a variety of tasks such as navigating and manipulating every day objects
     without any human support.

     In the assistive technology domain more than 20.000 products (not all involving an ICT
     component) have become available during the last decade. Unfortunately, most are produced
     in small series and therefore at a very high price. There is also much latent demand in that
     people in need of an assistive technology are not aware that a product is on the market.

     - In the smart home domain, support for the independence of older people can be provided by
     adding “intelligence networks” to the immediate home environment. ICT is used to integrate
     various home appliances, devices and services to enable residents to control and monitor their
     living space from any location within the home. This may encompass relatively simple home
     automation functions, such as turning lights on and off, smoke alarms or access control; it can
     also involve of fully automated electrical systems. Despite a considerable research effort to
     exploit smart home technology, actual take-up is still largely confined to experimental settings
     and demonstrators. The lack of technical standards inhibits the creation of the right conditions
     for a mass market for smart home applications. However, recent activities in the consumer
     electronics industry may lead to the emergence of a commercial value chain along which
     home networking products and services may soon flow to the consumer.

     - In the tele-care/tele-medicine domain, the focus is on applications utilizing ICT to enable the
     remote provision of support by parties that usually interact with older people in a care-related
     context. Applications include for instance alarm systems addressing security-related needs,
     e.g. getting help in an emergency, and the remote monitoring of vital data for medical
     purposes. Psycho-social needs can also be catered for with the help of video-telephony to
     provide social support and reassurance.

     76     Impacts of New Technologies and Information Society, ‘Walter’ demographic impact study by Empirica
            and the Work Research Centre, 2005 available at
            See also the Joint Research Plan on the basis of Article 169 of the Treaty on Ambient Assisted Living

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     Some alarm systems are location-independent, allowing users to initiate an alarm whenever
     and wherever they need to. Alarm systems are by now the most widely used Independent
     Living Technology application, although actual take-up varies considerably across countries.
     In the EU-15 Member States, on average some 4% of the 50+ population have such alarms.
     Figure: Community alarm services used by the EU-15 50+ population

     Source: Empirica – WRC 2005.

     While ‘active’ alarm systems require the client to actively call for help when an emergency
     arises, ‘passive’ systems are triggered by the absence of a particular event. The simplest
     passive alarm system consists of monitoring agreed regular telephone calls made by the
     individual to a service centre and triggering an alarm if a call is not made. More recent
     passive alarm systems have been automated and often combined with the monitoring of
     particular health parameters such as blood pressure or temperature.

     Market potentials will dramatically rise due to demographic development, particularly among
     the very old. For instance, the potential demand for tele-care applications capable of
     addressing the needs of people being treated for heart diseases is likely to nearly triple
     between 2005 and 2050, from 4 million to 11 million .

     The Independent Living Technology (ILT) domain has not yet matured; only few applications
     such as community alarms and assistive technology devices are widely available today. Many
     ILT implementations still exist only in experimental settings.

     In conclusion it can be stated that only a minority of older people are currently benefiting
     from ILT applications that have a high potential utility for them. Market forces alone will not
     ensure that ICT developments in response to demographic ageing will be optimal for older
     people and for European society as a whole. Public policy will be required to help shape
     developments in the ways needed to exploit the positive potential and reduce the likelihood of
     negative impacts.

     4.4.4.    Conclusion

     There is considerable scope for productivity growth in the EU, both in catching up with the
     productivity leaders and by investing in human capital as well as research and in
     development, thereby boosting Europe’s innovation potential and capacity to adapt to a
     changing economic environment. Older people, in particular the retired have still very low

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     levels of ICT skills and a below-average use of the internet77. This will also strengthen the
     ability of European businesses and workers to seize the new economic opportunities arising
     from the ‘silver economy’, i.e. new goods and services responding to the needs of an ageing

     4.5.       Receiving and integrating immigrants in Europe

     The Communication on the demographic future of Europe emphasised the importance of
     continued immigration. This will be necessary to meet the needs of the European labour
     market, both for qualified and unskilled labour. Europe’s prosperity and political stability,
     along with the dynamic population growth in neighbouring countries, will ensure that
     immigration can at least partly offset the decline in Europe’s potential labour force due to
     large cohorts retiring from the labour market and small young cohorts entering it. However,
     the Communication also stressed the importance of integrating immigrants and respecting the
     needs of their countries of origin.

     4.5.1.     The potential of migration for redressing labour market imbalances

     For more than two centuries, most countries of Europe have primarily been countries of
     emigration, but the last 60 years have seen all countries of Western Europe gradually become
     destinations for international migrants and asylum seekers. Today, all western European
     countries and several central European Member States of the European Union have a positive
     migration balance. Over recent years, net migration into the enlarged EU appears to have
     exceeded migration into other traditional recipient nations such as the United States of

     Figure 4.12 Net migration 1980-2005

     Source: Eurostat, OECD Employment and Labour Market Statistics.
     Notes: Net migration is measured as the difference between the total population on 1 January and 31 December for a given

     77       See also the Commission’s second annual progress report on the Information Society (IP/07/453),
     and the forthcoming
              communication on ICT and Ageing Well in the Information Society.
     78       There is also a supply side aspect to ageing as social services may also benefit from a larger proportion
              of elderly due to their involvement in volunteer activities.

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     calendar year, minus the difference between births and deaths (or natural increase). The figures reflect large-scale
     regularisations in some Member States.

     In some Member States, the number of deaths already exceeds the number of births (‘natural
     population decrease’), but positive net migration prevents the population from actually

     Over the coming years, more and more countries will experience a natural population
     decrease, so immigration might become increasingly important. Table 4.15 compares the
     projected decline in the working age population with the expected cumulative total inflow of
     migrants. It also shows the share of the gross fall (i.e. without migration) likely to be offset by
     projected numbers of immigrants (column IV). These are simplified assumptions, but the
     calculation gives a rough indication of the contribution of continued immigration in the years
     to come.

     Table 4.15 Population of working age and migration, 2004-2050
                               Non-EU                                   Immigration
                                                 decline in the
                            immigrants as                             assumed under
                                                 population of                                  III/(II + III)
                              % of pop.                                 the baseline
                                                 working age
                              2000-2004                                scenario 2050
                                  I (%)            II (thous.)           III (thous.)                IV
               CZ                 0.32              1932.6                  473.1                   0.20
               DK                 0.40                281.5                281.4                    0.50
               DE                 0.55              11263.5                7442.7                   0.40
               EE                 0.08                201.0                  19.1                   0.09
               IE                 0.38               -242.3                431.5                    2.28
               EL                 0.09              1577.8                 1047.1                   0.40
               ES                 0.98              7202.0                 4178.7                   0.37
               FR                 0.09              2433.6                 2347.2                   0.49
               IT                 0.41              9508.7                 4672.4                   0.33
               CY                 1.00                -52.6                164.1                    1.47
               LV                 0.04                378.7                  28.5                   0.07
               LT                 0.07                483.5                  37.6                   0.07
               LU                 0.59                -64.6                133.9                    1.93
               HU                 0.16              1495.3                  515.2                   0.26
               MT                 0.07                -16.4                  84.9                   1.24
               NL                 0.37                611.6                1491.7                   0.71
               AT                 0.76                730.1                957.2                    0.57
               PL                   :               6745.1                 417.5                    0.06
               PT                 0.12              1521.6                  522.4                   0.26
               RO                 0.02              4521.7                 -368.3                  -0.09
               SI                 0.37                322.8                189.0                    0.37
               SK                 0.05                991.5                  91.9                   0.08
               FI                 0.15                452.6                198.6                    0.31
               SE                 0.37               -136.0                961.8                    1.16
               UK                 0.43              2003.8                 4697.6                   0.70
     Source: Eurostat population projections.

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     Around 56 million persons entering the country and finding jobs would be needed to
     compensate for the projected reduction in the population of working age for the EU-27. Some
     countries, typically those with the highest projected fertility rates such as Ireland, would not
     need additional labour in order to maintain current job levels. Other Member States would
     require quite dramatic numbers of immigrants (Germany, Spain, Italy and Poland). All in all,
     net migration well above the European levels of recent decades would be necessary to
     compensate for the decline in the working age population.

     However, migrant inflows have varied dramatically in recent years across Member States,
     with countries bordering the Mediterranean receiving vastly greater influxes of migrants in
     absolute terms than other areas of the EU.

     Figure 4.13 Non-EU migration inflows, 5-year averages







                 LV   SK MT   LT   PT   FI   HU CZ BE   SI   SE     NL   IE   DK     IT   UK DE   LU AT ES CY EE    EL   FR

                                                             1990    1995     2000

     Source: Eurostat.
     Note: Years indicate first year of period. Rates are calculated as the number of non-EU migrants per year divided by total

     Not only the magnitude but also the nature of migration flows differs greatly across the EU.
     Figure 4.14 shows figures for a number of OECD countries. Illegal migration has been a
     major cause for concern in EU countries bordering the Mediterranean and Spain, Italy and
     Greece have all regularised the status of large numbers of illegal migrants within recent

     79          The European Council and the European Commission have taken a wide range of initiatives aimed at
                 dealing with the challenges posed by this issue, see COM(2005) 621, COM(2006) 402 and
                 COM(2006) 735.

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     Figure 4.14 International migration by category of entry, selected OECD countries,
     2004, harmonised data, % of total inflows

     Source: OECD.
     Note: OECD harmonised statistics, for details of sources see:

     To the extent that employment opportunities are unevenly distributed across the EU, the
     internal mobility of workers in the EU also represents an enormous potential for higher rates
     of participation and employment on the labour market. The full potential of intra-EU mobility
     is, however, not yet harnessed, as transitional arrangements still restrict the mobility of
     citizens from the Member States that have joined the EU since 200480.

     Table 4.16 shows that currently the percentage of non-EU nationals in EU-15 Member States
     is significantly higher than the percentage of EU-10 nationals. Labour market data show that
     employment rates among EU-10 nationals residing in other EU countries are comparable to
     the rates for nationals of those countries and other EU-15 nationals. Moreover, they are
     generally higher than for non-EU nationals. In Ireland, Spain and the UK, EU-10 nationals
     even have higher employment rates than local nationals. This shows that EU-10 nationals
     positively contribute to overall labour market performance, to sustained economic growth and
     to the state of public finances in their host countries81.

     80       See COM(2006) 48.
     81       Ibid.

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     Table 4.16 Resident population by nationality, 2005

                                                National EU-15 EU-10 non-EU
                                        BE         91.3           5.8         0.2          2.8
                                        DK         96.4           1.1          :           2.4
                                        DE         89.5           2.8         0.7          7.0
                                        EL         94.0           0.3         0.4          5.3
                                        ES         90.5           1.2         0.2          8.1
                                        FR         94.4           1.9         0.1          3.6
                                        IE         92.3           3.0         2.0          2.8
                                        LU         57.9          37.6         0.3          4.2
                                        NL         95.7           1.4         0.1          2.8
                                        AT         89.2           1.9         1.4          7.5
                                        PT         97.0           0.4          :           2.6
                                        FI         98.3           0.4         0.3          1.0
                                        SE         94.8           2.3         0.2          2.7
                                        UK         93.8           1.7         0.4          4.1
     Source: Eurostat, Labour Force Survey, 2005 Q1, Ireland 2005 Q2 for working age population, population statistics for net
     Notes: ‘:’ signifies data not reliable due to small sample size. Italy is excluded, since it does not disaggregate by nationality.
     EU-15 and EU-25 aggregates without Italy. EU-10 aggregate without Poland.

     Two Euro-area countries that experienced growth appreciably above the Euro-area average
     during the period 1999-2005, namely Ireland and Spain, illustrate the importance of
     migration. Neither of the two countries could have achieved such strong economic and
     employment growth without the massive inflow of foreign workers; estimates of the natural
     growth in population and the number of migrants entering these two countries (see table
     below) show that immigration has made a substantial contribution to the increased number of
     employed, although this contribution has been more modest in the case of Spain than for
     Ireland. While Spain has mainly had immigration from outside the EU, Ireland has benefited
     strongly from immigration from other Member States, particularly the EU-10.

     Table 4.17 Contribution of immigration to increased employment, 2000-2005

       Country          Total change in             From indigenous                 From migrants            From employment
                         employment                    population                                              rate increase
      IE                             261 876                        34 134                     175 102                       52 640
      ES                           3 333 463                       -53 196                   1 656 768                    1 729 891
     Source: Eurostat Labour Force survey and population projections.
     Note: Migrants and indigenous residents are assumed to have same employment rate in 2005. It is also assumed that the
     improvement in the employment rate applies to the 2000 population.

     4.5.2.      Unlocking the potential of migration

     The great challenges of international migration for receiving countries are centred on
     integration and social cohesion. The Member States of the EU have evidently had different
     degrees of success with labour market and social integration. Table 4.18 shows that the
     average educational attainment of non-nationals is generally substantially lower than that of
     nationals. It is noteworthy that in several countries, thanks to the presence of high-skilled
     migrants, the situation is reversed for tertiary education. Migrants are often, irrespective of
     their qualifications, pushed into low-end jobs. As a result, emigration countries are losing
     high-skilled workers while in the EU these skills remain untapped.

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     Table 4.18 Distribution of foreign and national population (aged 25 to 64 years) by
     level of education (2002-2003)

                   Less than upper secondary                  Upper secondary                       Tertiary level

                    Foreigners          Nationals         Foreigners        Nationals        Foreigners        Nationals
      BE                52.3               37.8               25.7             33.5               22              28.7
      DK                30.7               27.6               41.7             46.7              27.5             25.7
      DE                47.1               13.6               38.2             62.4              14.7              24
      EL                42.1               46.8               40.9             35.3               17              17.9
      ES                43.3               58.3               28.5             17.2              28.2             24.6
      FR                63.9               33.5               20.6             42.5              15.5             23.9
      IRL               21.3               40.1               28.6             35.4              50.1             24.5
      LU                43.8               27.5                38              56.7              18.2             15.8
      NL                43.7               31.9               31.5             43.3              24.8             24.9
      AT                42.9               19.3               43.4             63.7              13.7              17
      PT                55.4               79.1               28.1             11.1              16.6              9.8
      FI                29.1               24.8                46              42.4              24.9             32.8
      SE                23.7                18                45.4             55.5              30.9             26.5
      UK                30.9               17.4               25.5             53.1              43.6             26.2
      CZ                25.9               11.7               52.5             76.6              21.5             11.7
      HU                20.2               27.4               52.6              58               27.2             14.5
      SK                13.2               13.8               67.8              75                19              11.2
     Source: OECD/Sopemi, 2005.
     Note: For DK and NL 2002 data. 7.4%, 13%, 6% and 43.4% of the foreign population did not respond to the question on
     education attainment in Germany, Ireland, Sweden and the UK, respectively.

     Figure 4.15 shows that foreign-born individuals are often less well integrated into the labour
     market, although this differs across countries. Thus, in eight of the EU-25 countries,
     employment rates for locally born individuals outstrip those of both migrants born in the EU,
     and, to an even greater degree, of individuals born outside the EU. There is a dramatic
     contrast between the two employment gaps in Poland, although relatively few persons from
     other EU countries reside here.

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     BOX 4.5 Migration and Integration – Topics at the European Demographic Forum

     The Demographic Forum on in Brussels 30-31 of October 2006 was marked by keynote
     speeches that also touched upon the issue of migration. A strong case was made for the
     creation of a quota system designed to attract highly qualified immigrants with a minimum of
     bureaucratic difficulty, giving these migrants access to all EU Member States (the so-called
     Blue Card scheme)82. A better mix of both high- and low-skilled immigrants may exert a
     positive influence on the public perception of immigration and may help overcome the
     reluctance to welcome further immigration.

     In addition, as part of a workshop aimed at presenting examples of initiatives to meet the
     challenges of successful migration and integration, especially at local and national level,
     speakers stressed the considerable extent and importance of migration in Europe and the need
     for a truly European response. Other interventions highlighted examples of policies
     implemented at national level, of advocacy on behalf of minorities and of integration
     programmes at local level.

     Participants were told of the comprehensive initiatives launched in Portugal for the reception
     and integration of migrants under the aegis of that country’s High Commissioner for
     Immigration and Ethnic Minorities83. The Portuguese approach is multifaceted, involving the
     distribution of information (both for immigrants and the indigenous population), the
     consolidation of the institutions involved in a one-stop-shop philosophy, evidence gathering,
     support for advocacy initiatives and measures to raise public awareness and combat

     Figure 4.15 Employment rates 2006 (in %)











                 BE CZ DK DE EE EL        ES FR    IE    IT   CY LV    LT   LU HU MT   NL AT PL   PT   SI   SK   FI   SE UK

                                                Other EU       Outside EU     Native

     Source: Eurostat Labour Force Survey.
     Note: 2005 data for IE, LU, and IT; data by nationality for DE.

     82         ‘Welcome to Europe’, Bruegel Policy Brief No 3, 2006, see
     83         For more information visit

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     Migrant women face particular problems in the labour market, often in the form of dual
     discrimination, i.e. discrimination on the basis of both their gender and ethnic origin. The
     differences in employment rates between natives and non-natives are remarkably large in
     some countries. In some countries that have recently experienced large inflows of migrants
     such as Spain and Greece, employment rates amongst non-EU women are in fact higher than
     those for native women, which suggests that these countries have attracted female workers in
     particular (e.g. to work in the hotel and catering sectors as well as caring for the sick and

     Figure 4.16 Employment rates for women in 2006 (in %)


              0          10            20    30         40         50     60        70         80
                                               Native   Non-EU25

     Source: Eurostat Labour Force Survey.

     Unsuccessful integration may be the result of unwelcoming attitudes to immigration and
     migrants which may in turn be reinforced by the social problems linked to the poor integration
     of migrants. This may make it politically unacceptable to receive more immigrants.
     Eurobarometer survey results indicate that on average only 4 out of 10 EU citizens feel that
     immigrants contribute a lot to their country while a majority of citizens (52%) do not agree
     with this statement. However, there are significant differences between countries. While fully
     79% of Swedes have a positive opinion of the contribution of immigrants to society, only
     12% of Slovaks hold this view.

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     Figure 4.17 Citizens who feel that immigrants contribute a lot to their country (in %)











     Source: Standard Eurobarometer, fall 2006.

     4.5.3.     Conclusion

     Europe has much left to do in the areas of managing migration and integration. There is a
     need for more high-skilled immigration to complement the influx of low-skilled labour, for
     which there is also likely to be much demand. However, immigration is only helpful if
     immigrants and their descendants have equal opportunities for successful integration within
     the economy and society of their host country. Resentful attitudes towards immigration and a
     lack of understanding of the character and effects of immigration could well be the main
     obstacles to Europe making full use of this major opportunity to tackle the demographic

     4.6.       Sustainable public finances

     The Communication on the demographic future of Europe stressed that, in most Member
     States, public finances are not sustainable under current policies. This lack of sustainability
     can be the result of large debt and deficit levels today or of projected future expenditure
     trends not matched by resources available to governments in the form of tax revenues or
     accumulated reserves. In the worst cases, already unsound public finances are compounded by
     unsustainable expenditure trends linked to demographic ageing. Countries in such a situation
     will not be able to meet the needs of an ageing population and offer their elderly adequate
     pensions and/or health and long-term care.

     4.6.1.     Potential for tackling the demographic challenge

     Long-term fiscal sustainability can be assessed on the basis of the ‘sustainability gap’. This
     measures the size of the permanent budgetary adjustment (e.g. a constant reduction in public
     expenditure as a share of GDP or a constant increase in public revenue as a share of GDP)
     needed for a government to meet its ‘inter-temporal budget constraint’, thus ensuring

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     sustainable public finances84. The sustainability gap can be broken down into two
     components: the initial budgetary position which illustrates whether public finances are
     sustainable in terms of only the current budgetary position (i.e. the primary balance and the
     level of debt), and the long-term budgetary impact of ageing, i.e. the impact of the projected
     change in age-related public expenditure. This decomposition of the sustainability gap
     provides estimates of the extent to which the gap is due to the present (i.e. 2005) structural
     position and to the long-run budgetary impact of ageing. The results are presented in table
     4.19, where a low value indicates a favourable situation.

     Table 4.19 The ‘S2’ sustainability gap indicator (in % of GDP)

                                                              Initial budgetary
                                          Total                                           budgetary impact
                                                                                             of ageing
                    BE                     1.8                         -3.5                         5.3
                    CZ                     5.5                          0.7                         4.8
                    DK                    -2.2                         -6.1                         3.9
                    DE                     4.4                          1.6                         2.8
                    EE                    -3.4                         -1.8                        -1.7
                    EL                     3.0                          2.2                         0.9
                    ES                     3.2                         -2.7                         5.9
                    FR                     4.0                          1.4                         2.6
                    IE                     2.9                         -3.1                         6.0
                    IT                     3.1                          1.3                         1.8
                    CY                     8.5                          0.2                         8.3
                    LV                     0.8                         -0.4                         1.2
                    LT                     1.8                          0.5                         1.3
                    LU                     9.5                          1.2                         8.3
                    HU                     9.8                          4.8                         5.1
                    MT                    -0.3                         -0.1                        -0.1
                    NL                     1.3                         -3.1                         4.4
                    AT                     0.3                         -0.8                         1.1
                    PL                    -0.2                          2.6                        -2.8
                    PT                    10.5                          3.8                         6.7
                    SI                     7.3                          0.2                         7.1
                    SK                     3.0                          0.9                         2.1
                    FI                    -0.9                         -5.1                         4.2
                    SE                    -1.1                         -3.1                         2.0
                    UK                     3.5                          0.2                         3.3
                    EU-25*                 3.4                          0.3                         3.0

     Source: Economic Policy Committee and European Commission.
     * The rise in age-related expenditure for Greece is underestimated due to the lack of pension projections. The aggregate EU
     result excludes Greece.

     Nine Member States (BE, EL, ES, IE, CY, LU, HU, PT, and SI ) face a permanent
     sustainability gap in excess of five percentage points of GDP due to projected increases in
     age-related expenditure. A second group of ten countries can expect a more limited budgetary
     impact from ageing under current policies, with a gap ranging from two to five percentage
     points of GDP. A third group of seven countries face a moderate gap of less than two
     percentage points. In three countries the projected decline in public expenditure would turn

     84       See European Economy, No 4, 2006, ‘The long-term sustainability of public finances in the EU’.

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     the gap positive i.e. projected revenues would exceed projected expenditure (notably Poland
     where the decline is mainly due to a projected decrease in the benefit ratio).

     Sound public finances can be seriously undermined by the level of interest payments as a
     percentage of total government revenue (see Table 4.20). Too high a level of interest
     payments due to past mistakes in budget policy is an additional challenge that needs to be
     overcome in order to arrive at long-term sustainability. In the mid-1990s, Italy used more than
     a quarter of government revenue to service its public debt, and Greece one third. Since then,
     interest payments have gone down considerably, albeit not primarily as a result of debt
     reduction but rather thanks to the lower interest rates made possible by the introduction of the
     Euro. In 2005, Italy and Greece spent 11% and 13%, respectively, of their public revenue on
     interest payments. This is still a large amount of money that would otherwise go a long way
     towards meeting future ageing-related needs or could be used for investing in education,
     research and development, better support for families or new infrastructure, thereby laying the
     foundations for future growth.

     Table 4.20 Public finances today
                                                    General         Primary
                      Share of total government                                      General
                                                  government         budget
                         revenue devoted to                                        government
                                                    deficit(-)/     deficit(-)/
                          paying interest on                                      gross debt as
                                                  surplus(+) as   surplus(+) as
                          government debt                                           % of GDP
                                                   % of GDP        % of GDP
                       1995         2000   2005       2005            2005            2005
           BE           18           13     9         -2.3             1.9             93.2
           CZ           3            2      3         -3.6            -2.5             30.4
           DK           11           7      4          4.9             6.7             35.9
           DE           8            7      7         -3.2            -0.5             67.9
           EE           0            1      1          2.3             2.5              4.5
           EL           33           19     13        -5.2            -0.4            107.5
           ES           14           8      5          1.1             2.9             43.1
           FR           7            6      5         -2.9            -0.2             66.6
           IE           15           6      4          1.1             2.1             27.4
           CY            :           10      9        -2.3             1.1             69.2
           LV           3            3      2          0.1             0.7             12.1
           LT           1            5      3         -0.5             0.3             18.7
           IT           26           14     11        -4.1             0.5            106.6
           LU           1            1      0         -1.0            -0.8             6.0
           HU            :           12      9        -6.5            -2.6             57.7
           MT            :           10     10        -3.2             0.8             74.2
           NL           13           8      5         -0.3             2.1             52.7
           AT           8            8      6         -1.5             1.3             63.4
           PL           13           8      6         -2.5             0.1             42.0
           PT           17           8      7         -6.0            -3.3             64.0
           SI            :            6      4        -1.4             0.3             28.0
           SK           4            8      5         -3.1            -1.4             34.5
           FI           7            5      3          2.7             4.1             41.3
           SE           11           7      3          3.0             4.6             50.4
           UK           10           7      5         -3.3            -1.1             42.4
           EU-12        12           9      7         -2.4             0.5               :
           EU-25         :            8      6        -2.3             0.4             63.2
     Source: European Commission.

     With an overall government deficit of 2.3% of GDP in 2005, the (then) EU-25 Member States
     had clearly not been extending their financial room for manoeuvre to prepare for an ageing

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     society. However, they did run a small primary budget surplus (i.e. the government balance
     after deduction of interest payments), indicating a move towards consolidation. Total
     government debt for the EU-25 rose between 2002 and 2005 by almost three percentage
     points of GDP to above the Treaty reference value of 60% of GDP for the EU-25 and nine
     Member States in particular, which had to channel at least 5% of their revenue into interest
     payments. These Member States face significant challenges in consolidating their public
     finances before the impact of ageing starts to materialise.

     Large projected increases in ageing-related spending, possibly combined with an
     unfavourable initial budgetary position, expose a number of Member States to serious
     financial risks. Based on indicators such as the sustainability gap, the Commission has made
     an overall risk assessment. Six countries are assessed as a high-risk, ten as a medium-risk and
     nine as a low-risk in terms of the future sustainability of public finances85. The high-risk
     countries (CZ, EL, CY, HU, PT and SI) are characterised by a very significant rise in age-
     related expenditure, indicating a strong need to curb future spending trends.

     The medium-risk countries (BE, DE, ES, FR, IE, IT, LU, MT, SK and UK) can be split into
     two groups. On the one hand, there are countries that can expect significant ageing costs, but
     have a strong budgetary position (ES, EI and LU). These countries have preserved some room
     for manoeuvre which could allow them to accommodate to some extent future ageing-related
     needs. The second group of medium-risk countries are characterised by moderate projected
     expenditure increases as a result of reforms that have already been undertaken, but some
     budget consolidation nevertheless remains necessary (SK, IT, DE, FR, UK and MT).

     Finally, the low-risk countries (DK, EE, LV, LT, NL AT, PL, FI and SE) have established
     both a solid budgetary position today (running large primary surpluses, reducing debt and/or
     accumulating assets) and have curbed future ageing-related expenditure increases thanks in
     particular to reforms of their pension systems.

     4.6.2.    Unlocking the potential

     The analysis of the two components of the sustainability gap highlights that more than half of
     the Member States face a significant challenge to consolidate their public finances in order to
     prepare for the impact of demographic ageing. Clearly, the best time for doing so is over the
     next ten years, during which most Member States should still be able to achieve significant
     employment growth.

     The risk with a rapid consolidation of public finances is of course that this might reduce a
     country’s future growth potential, for instance, if spending on education, research and
     development or infrastructure (including social services such as childcare) is curtailed. The
     key to the successful exploitation of the window of opportunity is to adjust both the current
     and medium-term public finance position through the mobilisation of the full potential of the
     baby boom cohorts and reforms in pension and healthcare systems. The next ten years will
     determine to what extent the considerable economic potential of this large and still active and
     healthy age group will be used and hence contribute to GDP, or whether most of the people in
     these cohorts will prematurely become dependent on benefits, as has been the case until now,
     due to early labour market exit. Moreover, there is still some time left to promote healthy

     85       ‘The short-term sustainability of public finances in the EU’, Communication from the Commission,
              COM (2006) 574.

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     ageing among these cohorts so that the need for costly health and long-term care can be
     reduced or at least postponed.

     The report by the Economic Policy Committee and the European Commission on the impact
     of ageing on public expenditure (2004-2050)86 analyses the effect of changes in the labour
     force participation of older workers and additional productivity growth on future pensions
     expenditure (see table 4.21). The calculations show that an increase of five percentage points
     in the employment rate of older workers would have only a modest impact on future pension
     expenditure in terms of percentage points of GDP (i.e. -0.2 percentage points in the EU-10
     and -0.1 percentage points in the EU-15). This is due to the fact that people working longer
     will accrue additional pension rights and thus receive higher pensions when they retire. In
     some countries, annual pension adjustments also take into account the development in
     aggregate employment levels, allowing higher increases in pensions when employment is
     higher (as is the case in DE).

     Table 4.21 also shows, however, that faster productivity growth can have a strong impact on
     future pension expenditure as a percentage of GDP. This illustrates the importance of
     maintaining sufficient public spending on education, lifelong learning and research and
     development. The Financial Services Committee (FSC) has stressed the need for further
     monitoring of market innovation and a level playing field in order to promote the
     development of a Single Market for retirement products87.

     Table 4.21 Changes in gross public pension expenditure increases as a share of GDP
     between 2004 and 2050
                                               Employment rate of older          Annual labour productivity
                      Baseline change,
                                                workers increased by 5            growth increased by 0.25
                                                  percentage points                   percentage points
                                                     Difference relative to the baseline projection
           BE                5.1                         -0.3                                -0.4
           CZ                5.5                         -0.3                                -0.3
           DK                3.3                         -0.3                                 0.0
           DE                1.7                          0.0                                 0.0
           EE               -2.5                         -0.4                                -0.2
           EL                 :                            :                                   :
           ES                7.1                         -0.1                                -0.9
           FR                2.0                         -0.4                                -0.4
           IE                6.4                         -0.1                                 0.0
           IT                0.4                          0.2                                -0.5
           CY               12.9                           :                                 -1.4
           LV               -1.2                          0.0                                -0.1
           LT                1.8                         -0.3                                -0.3
           LU                7.4                           :                                 -0.1
           HU                6.7                         -1.1                                -0.4
           MT               -0.4                          0.0                                -0.7
           NL                3.5                         -0.1                                -0.1
           AT               -1.2                         -0.4                                -0.8
           PL               -5.9                          0.0                                -0.4
           PT                9.7                         -0.2                                -1.2
           SI                7.3                         -0.9                                -0.1
           SK                1.8                          0.1                                -0.2
           FI                3.1                         -0.2                                -0.4
           SE                0.6                           :                                 -0.2
           UK                2.0                         -0.1                                -0.4

     86     The impact of ageing on public expenditure: projections for the EU-25 Member States on pensions,
            healthcare, long-term care, education and unemployment transfers (2004-2050); Report prepared by the
            Economic Policy Committee and the European Commission, Directorate-General for Economic and
            Financial Affairs, published as European Economy Special Report No 1/2006.
     87     See Doc. 8797/06 EF 9 ECOFIN 140 and FSC 4162/07 REV 1.

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              EU-15            2.3                         -0.1                 -0.3
              EU-10            0.3                         -0.7                 -0.4
              EU-25            2.2                         -0.1                 -0.3

     Source: Economic Policy Committee and European Commission.

     The projections of the Economic Policy Committee for healthcare spending also illustrate that
     the increase in healthcare spending could be limited if the projected increase in life
     expectancy were accompanied by an increase in healthy life years and an improvement in
     health status. Ageing is however not the only factor determining future healthcare
     expenditure. There are several non-demographic factors that drive up healthcare expenditure
     such as institutional arrangements, health status, income elasticity of demand, unit cost
     developments in the healthcare sector or technological change. The latter can, on the one
     hand, reduce unit costs (as existing expensive treatments are replaced by less costly
     treatments) and thus expenditure, but may, on the other hand, yield new and more expensive
     treatments and drugs, leading to increasing expenditure. Many of these factors can be
     influenced by changes in public policies resulting in very different expenditure trends. While
     improvements in the health status of elderly citizens could reduce the projected increase in
     healthcare expenditure, increased demand or improved quality of services could offset this

     The third main ageing-related public spending category is long-term care. There is great
     variation in current public provision for long-term care in the EU (which ranges today from
     0.1% of GDP in Poland to 3.8% of GDP in SE). The projected increase in spending is 0.6
     percentage points of GDP for the EU-25. This is based on the assumption of no policy
     change, i.e. countries currently relying mainly on informal care will not develop formal care
     systems. However, the projected rapid increase in the number of very old people and
     increased female labour force participation are more than likely to lead to more demand for
     formal care. In this sense, the great differences between Member States in the projected long-
     term care expenditure should be interpreted rather as revealing gaps in the provision of long-
     term care services than as being realistic projections for actual expenditure. As in the area of
     healthcare, there is scope for influencing future needs through prevention policies and by
     making care systems more cost-efficient, in particular by ensuring that the elderly can stay
     longer in their own homes.

     4.6.3.    Conclusion

     The ageing population and in particular the imminent retirement of the baby boom cohorts
     will have a determining influence on the future sustainability of public finances and hence
     society’s ability to provide adequate pensions, health and long-term care without jeopardising
     investment in future generations. Making the best possible use of the potential of the window
     of opportunity, through a mobilisation of the full potential of the baby boom cohorts by
     encouraging them to stay longer on the labour market, will be the key to ensuring adequate
     living standards for the elderly without jeopardising the life chances of younger generations.
     In addition, people can be encouraged to reduce their future need for health and long-term
     care by adopting a healthy lifestyle that helps prevent chronic disease and dependency. And
     finally, full use should be made of the scope for making pension, health and long-term care
     systems more efficient and putting them on a sound financial footing.

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     This report has highlighted how much potential there is for tackling the demographic
     challenge in five key areas and which obstacles need to be overcome to unlock this potential.
     Action in one field alone is unlikely to be sufficient and a mix of policies will be required.
     While this report mainly focuses on mitigating the impact of the challenge through increasing
     the overall size of the workforce, a wide range of other issues are also relevant to meeting the
     demographic challenge and seizing opportunities. For instance one important issue not dealt
     with in this report is the impact of demographic change on the environment. Further analysis
     is also required of ageing and the need to improve the European market for long-term savings
     products. The effects of migration would also deserve further analysis. Subsequent reports, to
     be published in connection with each future European Demography Forum, will touch in
     more detail on these and other subjects so as to support an informed and constructive debate
     both at European level and in the Member States.

     Nevertheless, the very cursory analysis presented above confirms the confident tone of the
     Commission regarding the demographic future of Europe: it is possible to tackle the
     demographic challenge provided the window of opportunity of the next ten years is used. This
     is a period during which Europe can still count on the active involvement of the baby boom
     cohorts and other factors such as rising employment amongst women. A spirit of inter-
     generational solidarity and the advancement of equal opportunities will therefore be crucial
     elements in exploiting this opportunity.

     Each Member State faces different opportunities and will therefore want to set different
     priorities according to its specific circumstances. The country summaries in the annex to this
     report contain some key data, both on demographic trends and on the opportunities for
     responding to them. The summaries are not an attempt at cross-country comparisons but
     simply aim to provide an accessible overview for each Member State of the state of play in
     relevant areas, as an aid to setting country-specific priorities in preparing for demographic

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     Annex I. Country statistics and comments

     Annex II. European research projects on demographic change and its impacts

     (Separate Word file)

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